/ Money

Upfront current account fees aren’t the answer

Broken piggy bank

As our research throws yet more light on the real cost of banking, and the CMA calls for an inquiry into competition in banking, the first reaction has been to call for an end of free banking. But is that really the answer?

Britain’s retail banking sector has taken a couple of knocks in the last week. Firstly the Competition and Markets Authority (CMA) produced its report on the current account market, which suggested levels of switching were ‘not what would normally be expected in well-functioning, competitive markets’.

Meanwhile, we’ve just published research into the real cost of banking which shows that there are vast differences in the amount of overdraft fees attached to current accounts.

Differences in overdraft charges

Our research, based on real life examples, found that a regular authorised overdraft user’s charges could range from 6p to £60 over a three month period, depending on who they banked with. Meanwhile, a regular user of unauthorised overdrafts could be subject to fees ranging anywhere from 25p to £150.

In short, it’s almost impossible for even the most savvy customer to work out if they’re on the best current account. Current account switching – despite being reformed last year by the Current Account Switch Service – has a lot further to go.

This is shown in an earlier survey, where half of consumers who haven’t switched banks told us they’d be more likely to do so if it was easier to compare accounts, yet only a quarter agree that this is easy to do at the moment.

Banking at a price

Some banks have responded by calling for the introduction of current account fees. According to its supporters, a single account fee would aid transparency and facilitate switching as the cost of the account would be clear to customers.

However, as our research shows, free banking is a myth. If upfront current account fees were introduced, would overdraft charges really disappear? Would they become simpler to understand? And why should those who never use their overdraft – or don’t have one – pay for those who do?

Plus, an upfront charge puts a barrier in the way of the vulnerable and often elderly customers who may find it difficult to take part in mainstream financial activity.

Data is the key

It’s in this context that the Government’s midata scheme could come into its own. From April 2015, current account customers will be able to download data on their last 12 month’s transactions. They will then be able to feed this into a comparison site to check how much their account is costing them and whether another would suit them better.

While six of the biggest high street banking groups have signed up to midata so far, the whole banking industry needs to take part to ensure competition in banking. It’s this subtler, empowering, approach – rather than the blunt instrument of a blanket upfront fee – which holds the key to a more competitive current account market.


My current account has online banking, a chequebook, statements, direct debits, a branch and is free. I use it sensibly, and would like it to either stay free, or if necessary pay for itself by keeping a sensible balance in it.
Two comments on the introduction:
– it may be that most people do not switch accounts because they are happy with their bank, as I am.
– Using unauthorised overdrafts as a criteria for judging the cost of an account I find quite unacceptable, in particular when you suggest this is a regular occurrence and not a rare slip: “a regular user of unauthorised overdrafts could be subject to fees ranging anywhere from 25p to £150” . A bank will allow you an overdraft facility if you ask and if you are creditworthy. If you don’t ask then you are using money you are not entitled to and that you may, in the bank’s eyes, not be in a position to repay. It’s like taking cash out of your mum’s purse without asking. You are clearly not in control of your finances, and this should worry the bank. So why do you persist in using it to judge an account? The bank is rightly penalising those who misuse their accounts.

totally agree.

The unfair part is that if you mistakenly go overdrawn by a few pence you are not informed, and are charged large fixed sums, added to daily. It is not meant to be a deterrent, but is a scam introduced by the bank to make money.

Alan Reynolds says:
27 July 2014

A bank account is one way of receiving and of paying out money. There is very little difference in the methods used, between one bank and another. So we have account to account transfers (BACS, FPS), cash deposits or withdrawals (ATMs, branches, cashbacks at supermarkets), payment cards (debit, credit, contactless) etc. In fact, for the money systems to work conveniently there needs to be no differences in the systems. How easy each bank makes it to use each of these facilities is where they can compete. I have such accounts with five banks in the UK and use whichever makes it easier to complete that type of transaction. I dont by which I mean I dont close one and use another; I simply use one more than another depending on what type of transaction I want to do.

malcolm r, I agree with you that it’s unreasonable to judge a bank’s overall charges by assuming the use of regular unauthorised overdrafts. However, I disagree with your implication that unauthorised overdrafts are the customer’s fault. Quite often, a customer can get stung by surprise direct debits for such things as obscure recurring annual insurance premiums for policies they have forgotten they had, or throught they had cancelled when the company had lost their instructions. Or the various scams where the customer thinks they are buying a single item when in fact the small print says they are entering into a subscription. I lay the fault on the bank for this type of unauthorised overdrafts. If the overdraft is not authorised, then why on earth did the bank authorise the direct debit when there was clearly not enough money in the account in the first place? The answer is, of course, so the bank can charge these extortionate fees. I really don’t see how the bank can justify calling it an “unauthorised” overdraft if it was the bank itself that authorised the direct debit which made the account go beyond its authorised overdraft limit.

clint, it is still the customer’s responsibility to remember their recurring payments, and to ensure they don’t get into unwanted subscriptions – we cannot blame the bank for these errors. Whilst I agree (and have inferred) that a rare inadvertent slip into the red can happen, my criticism was with the “regular user of unauthorised overdrafts” cited by Which? This is not due to “surprise” transactions.

I totally agree. Why should I have to pay bank charges just because others do not manage their finances wisely?

It’s actually the other way around, Brian. Currently, the “others who do not manage their finances wisely” are subsidising your bank account. If it weren’t for them, you would surely have to pay bank charges. Does it still seem fair to you?

Ian, “The unfair part is that if you mistakenly go overdrawn by a few pence you are not informed, and are charged large fixed sums,”. I don’t know how your bank charges, but mine allows a £15 buffer to cover this eventuality before it charges.

This is a very dangerous situation for Current Account users. Be very careful with ‘standing orders’. I moved my direct debits to a new bank, my standing order to a cancer charity of just £4.00 per month continued to be paid for acouple of months, and I was faced by a bill for over £90.00 before realising what was happening. I believe the banks should be forced to give an ‘opt-in’ choice for those of us who do NOT want an overdraft facility.

If banks are to introduce charges, then they must be related to cost. I would hate to have a system like in France where debit cards have an annual fee and cheques are free, totally the opposite of the costs.

In the spirit of relating charges to cost, payments requiring human intervention or machinery (e.g. telephone banking or cheques) should be charged for, while all payments instructed online (including cross-border payments) should be free of charge.

I also think that bank customers should be incentivised to use cash machines belonging to their own bank. For example, if I have a choice of my own bank’s cash machine or that of another bank, I use my own bank’s machine, because I know that it avoids my bank having to pay a fee to another bank, even though it’s free for me in both cases. All bank customers should be incentivised to do the same as me. First Direct once wrote to its customers asking them to do this as a favour to the bank from its loyal customers, but without direct incentives.

Vivid says:
23 July 2014

I live in the country and use my local post office to withdraw cash/deposit cheques.

It makes no difference whether a bank pays its own staff or a third party such as the post office to carry out these manual transactions. Someone still needs to pay for the service to be carried out. Currently the cost is spread out across customers; I’m suggesting that only the customers who use those services should pay for them.

If we are going to be fair then the transaction costs for online transfers and card payments need to include all the costs involved in providing these services and not just the transaction costs with the infrastructure in place. I have a friend who worked until recently in security etc for one of the larger banks and the ongoing cost is considerable.

Visiting your bank for “advice” might then also be chargeable – branches and their staff cost money! This all illustrates the problem – how do you charge for all the “services” a bank provides, how do you ensure those charges accurately reflect the cost involved (a current topic – it can’t be done realistically, can it?) and how do you protect those vulnerable people who have a lot of transactions to fund?
Banks have evolved charging regimes over a long period; the danger of trying to impose a “quick fix”, particularly by people outside the system, is they will get it wrong, and we will all suffer.
As things stand, one contentious issue for current accounts seems to be the amount paid for regular (authorised) overdrafts. In the knowledge that you require to borrow money regularly you could trawl the banks to find the best deal; as stated above charges vary from 6p to £60 over three months – is this not “competiton”? I’d be more worried if all charges were the same. An alternative, if it were cheaper, would be to take out a loan to cover your regular dips into the red?

What an arrogant attitude. You are completely ignoring the needs of disabled people, particularly those with a visual impairment, who have no choice but to use a telephone banking process, or branch visit. This latter is not always an option open to them with the way in which banks are closing branches up and down the country.
Your comment about the choice of using your own bank’s ATM against one belonging to another bank also shows that you have ready access to such a choice. Those who live in many towns and smaller urban areas do not have that luxury.
The banks make a lot of money from their cosy relationships with each other and with our money to give everyone free banking and this is how it should be.

Malcom R says: “how do you [the bank], charge for all the “services” a bank provides?”
Answer. The bank holds the investors’ money, which it then invests to make a profit……simples!

Ian, the point I was making was how do you put a true cost on every single service the bank provides to each customer (that can then be passed on to the customer).

Well of course the banks would like up front charges, everyone likes a guaranteed revenue stream. I wouldn’t take much notice of that.

It would be useful for this sort of discussion to know how the market is segmented. How many people always stay in credit; how many are regularly overdrawn; how many are serial transgressors. If the vast majority fall in to the first camp then trying to force competition on price is a doomed enterprise. Everyone will go with whoever is free of charge or pays a bit if interest, and won’t give a toss about punitive charges because they’ll never have to pay them. The only way the banks can compete for such people is on service and reputation. Me, my money resides with mutuals: plc shareholders will have to find someone else to line their pockets for them.

Andy says:
26 July 2014

Currently I hold three accounts at different banks. 2008 and the ongoing Eurozone fiasco showed me the folly of putting all of my eggs in one basket. Introduction of charges would force me to consolidate into one bank and be exposed to potential bank collapse because the bank crisis is not over by any means. The ECB has stated that in future banking crises troubled banks would be allowed to collapse, however, what the EU say and what they do are frequently different.

A single account would also put me at risk of being unable to access my funds for several days due to ‘technical failures’ e.g. RBS. Natwest.

If banks introduce charges per item then I would expect to have the option of determining whether banks are worth the money and elect to dispense with accounts altogether. However, Mad Tony has forced me to hold an account so legislation would need to change. I am concerned that banks will aply a transaction charge for all services including the small PIN-less transactions increasingly in use. In this scenario I would opt to use cold, hard cash.

I’d better fit a zip on my mattress…

Andy, both you and Wavechange have raised the issue of card charges. As you infer, small transactions on contactless cards will cost something to process.If we pay the true cost for all the services we use from our bank, these could be substantial for a heavy user.
It did prompt me to think of Credit Card charges; these are paid for by the seller and can be around 2% of the purchase price. I presume the main charge here is for the “up to 56 days” loan of money to the buyer, as the actual processing charge should be the same, irrespective of transaction value? Many years ago you could negotiate with the seller that if you paid by cash (or cheque with the sadly-defunct guarantee card) they would reduce your purchase price to reflect the credit card fee. I believe that was then made illegal (I wonder who the main lobby group was?) In effect every retail transaction includes a fee in case you use a credit card – that seems protectionist to me, and surely illegal if we revisited it? However, in some areas the discount is, in effect, alive and well. If I pay my council tax by Credit Card they charge me 2%; if I pay by debit card there is no charge. The same with Road fund Licence and some other organisations. OK, in these cases it is a surcharge rather than a discount, but either way money is saved, which is all that matters. The lobby didn’t get here? Or am I wrong in my analysis?

David G says:
26 July 2014

As well as Card charges, most banks seem to charge businesses to put cash into their account and also for taking cash out. If some Credit Card Issuers give say a 2% cashback to some customers, they may charge the business over 2%. It only seems fair for the business to ask for 2% extra, to the detriment of the Card Holdres who do not get the 2% rebate.
Do we really want to be having multiple cards and Bank Accounts to save a penny here and there.

They are complacent and wasteful enough with our money, lets not pay them to be more so. Banking and business rewards its failures too readily with outrageous pay settlements, to ask us to fund it is adding insult to injury.

Ron L says:
26 July 2014

Being a member of the older population I can remember the days before ATMs, online access etc, when everything was done by cheque or cash. In those days banking was manually-intensive – lots of staff behind counters and behind the scenes, yet banking was free. The introduction of ATMs meant great reductions in staff, and presumably great savings to the banks, yet a few years ago they actually tried to persuade us that we should pay for ATMs. Fortunately that failed. Now they want us to pay for running our accounts, even though we do a lot of that ourselves online. How come many years ago they could fund a very manual process from their own business profits, whereas now they want us to pay for a heavily automated one? Either incompetence or greed by the banks?

Banks exist for the benefit of their shareholders, not their customers. They’re not in it out of the kindness of their hearts, Their function is to squeeze you for as much as they can get without prompting you to up sticks and leave. That’s how capitalism works; the only way you can get it to behave responsibly is through regulation. No much chance of that in any meaningful way with the current business obsessed political establishment.

Banks exist for the benefit of shareholders by providing a service for their customers in many fields. The fact that there is an outcry when the last bank in an area closes demonstrates that many consumers feel they provide a benefit.

In the past, banks were (and some still are) free for private consumers, but you paid to deposit business cheques even if you were a sole trader working from home.

I run two current accounts (one free and one charged for) and move money between them depending on competitiveness with regard to charges and the interest offered.

Michael says:
26 July 2014

If a bank does take part, perhaps the government could list the cost of their accounts as being between the upper and lower rates you show here (e.g. 25p-£150 for an unauthorized overdraft). This might encourage them to take part in order to show their fees are not sky high.

I don’t see that the fees for a regular unauthorised overdraft should be used by Which? as a criterion for choosing a bank as it amounts to a dishonest transaction. As I have said before, in my view it is using money the bank has not agreed to let you have. Stick with legitimate uses of a bank account when comparing costs.

I’m not sure if it is a dishonest transaction if banks are happy to provide the facility, which judging by the interest rates for unauthorised overdrafts must be lucrative and presumably cover the costs of unrecovered debts.

I do agree that fees for unauthorised overdrafts are not a good criterion to judge banks by, but others might disagree.

I understand your point wavechange. I just think that as banks offer authorised overdrafts to all who they consider creditworthy, then it is easy to set up a legitimate facility. If you don’t then it may be because the bank would not consider you a suitable risk; that is when deliberately taking out more than you have is less than honest. I would exclude those who inadvertently slip into the red, but very rarely.
I find the acceptance by Which? of “a regular user of unauthorised overdrafts” very uncomfortable, to say the least.

chris w says:
26 July 2014

I am happy with my free bank account. To get extra interest I could pay a monthly charge. This would end up costing me more. I do not run an overdraft .If it is stopped justlike when gov changed the rules on utility charges it will cost me more.

ali says:
26 July 2014

Plan: Close down as many direct debits as possible (unfortunately this would include three monthly charity ones).

Withdraw one large sum per month and pay for purchases by cash. (I don’t gain anything by having cash in a current account anyway (no interest)).

I would recommend anyone interested in this discussion find out about the way in which our financial affairs are ruled over by the Bank for International Settlements. You might then want to start and think a little more about what our banks actually do for us and what they have done to us in the past. Like for example, the Bank of England governor who allowed the N**i’s to get hold of the gold from the countries they overran, particularly Czechoslovakia, which was surely a treasonable act, which was then rewarded by a Baronetcy. Also the way in which BIS knowingly traded in the looted gold from the Jews they exterminated in the Holocaust.

‘The real cost of banking’…. What I really want to know is what it actually costs the banks to process transactions. How many fees reflect this? Do charges in other countries reflect the true cost or are they as outrageous as in the UK?
I have never been overdrawn by more than £5 (authorised o/d) in my entire adult life so I have never paid any of my banks more than a few pence interest. Obviously I would not be happy if free banking ended!

If banks paid interest and charged account fees on current accounts, then the interest would be subject to income tax and the fees VAT. No thank you!

Incidentally some banks offer monthly interest earning accounts which can also be used to pay bills electronically on request from their owner (but not by standing order). One doesn’t begrudge the income tax, because there are no charges.

Having given this some thought I think that it is probably best to stay with ‘free’ banking, which is of course funded by the banks using our money and existing chargeable services including interest on overdrafts. It has the advantage of simplicity, which is something that we need in other sectors such as supply of energy

Joel says:
27 July 2014

If I had a choice, whether to use a bank / Building Society or not, then charges would be a reasonable price to pay. I do not have a choice.

Why should I pay a charge for not just being obliged to use a bank / BS but also even if I simply run my account and keep it in credit? I can’t escape a bank account; it receives my pensions (no option) and pays my subscriptions (no option) and at least one utility bill as they will not accept other payment systems such as the Post Office. I have to use an ATM to get my money, as other options have been made impracticable by the banks / BSs and the creation of widespread Sunday trading. Where is my choice?

I do not use the bank’s / BS’s specialist services – why should I pay for others who do? Banks / BSs use my money to grow their surpluses. My pensions enter the account on specific dates as lump sums, and I withdraw or transfer the money I need only when it is due out. What happens to the money in between? It is bulked with others’ and used for short term investment, which grow the organisation’s surpluses; it underpins loans and mortgages to other customers, so the bank earns more interest on our money, without paying us for the use of it.

If I’m to pay a service charge, I want something useful in return. Not their in-house insurances which would never make a ‘best buy’ nor their ‘discounts’ on products and services I don’t use. I demand a fairer crack of the whip, guaranteed before the whip is raised!

We are in a minority wanting to pay only for what we actually use.
Banking isnt alone in this packaged approach, subscription TV packages, Insurance policies, £10 meal deals in supermarkets and even fibre broadband is cheaper if you take a package with your phoneline.
This approach is obviously a very successful business model otherwise companies would not use it.

H. T. Porter says:
28 July 2014

O.K., make everyone do business on line or use automated machines and then sack everyone. Who is going to then have a job to pay for these services, hmmm? My contention is that the banks use my money and do not pay me anything for that use and so should not charge me to use their services.

Not quite. Get everyone in work actually creating or adding real value rather than pushing paper for a percentage.

Maybe one (satirical) answer is a BAT – Bureaucracy Added Tax instead of VAT on everything. That way BATty schemes to take money are discouraged, whereas real value creation is rewarded with well earned pay.

Difficult in the detail certainly, but certainly something worth aiming for.

The introduction mentions ” It’s in this context that the Government’s midata scheme could come into its own.” There was a previous conversation (https://conversation.which.co.uk/consumer-rights/midata-personal-data-jo-swinson-energy-bills-mobile-phone-tariff/ ) in which the Minister for Consumer Affairs attempted to sell the midata scheme. A number of contributors to that conversation raised concerns about the security of such a scheme, together with other worries. I wonder of those concerns have been addressed…….?

Hi Malcolm, I’ve reached out to our midata expert, who has said:

We can appreciate many of the concerns that have been raised about security. The final details of the Government’s midata scheme for current accounts will be ironed out over the coming months, ahead of it being available in April next year. We’ve been meeting with the Government and the banks to make sure that the concerns people might have about security are being addressed – for instance that sensitive data is appropriately anonymised. Overall, we think midata will be a really useful tool to allow people to properly compare the costs and benefits of current accounts, and we’re hopeful that it can be done in a way that will ensure people’s security is appropriately protected.

Thanks Patrick. The comment reflects the optimism officially expressed in the original discussion. The concern then, as perhaps now, is that the statement “we’re hopeful that it can be done in a way that will ensure people’s security is appropriately protected” would be much more reassuring if “we’re hopeful that it can” had been replaced by “it will”. Sorry to be a sceptic, but we’ve seen government software schemes fail through function and security before, despite them being “hopeful”.

Alistair says:
28 July 2014

I feel as though I have to be very thick. In this day and age of computers, it still takes four days to transfer money? slow?

If you were to total all of our money that is held for four days “in limbo” and in the Bank’s hands, how many billions of our money do they have FOR FREE?? It doesn’t matter that the money is passing through it is the total they have and then look to give us a miserly percentage [or nothing] whilst charging maybe 30% if we should reciprocate!

OK the UK government threw millions at the banks, millions of our money they are entrusted to manage on our behalf. What benefit have we gained? The banks took our money and so far what has returned to the National Purse. Do the banks AND the government consider the people they are “supposed” to look after nothing but dim-wits with but one task – to feather big business, banks, a few unnecessary wars, countries with civil ‘unrest’, and government overpopulation?

On a slightly related topic, I noticed how the Americans fine banks, including our own, millions and billions of dollars for misdemeanours – Libor, FX, for example. It’s a good way to boost the American economy – perhaps we should try it with the US banks that also contributed to our troubles. However, where does this money come from? Us (not US but you and me) – either through paying higher charges to rerstore the banks fortunes, through higher taxes if the Govt has to support the banks, by cutting/stopping shareholder dividends.
The trouble is a fine, even of these magnitudes, is just a business expense – no people are generally called to account. What should be done is to prosecute the individuals who perpetrated the malpractice, those in the know who supervised them and those who set the banks policies (and who knew what was going on). We’d lose a lot of bankers? Well, perhaps if those involved knew there would be personal penalties – disqualification, large personal fines, perhaps custodial sentences – they would think twice before embarking on, or turning a blind eye to, dodgy or illegal practices and behave more responsibly.

Gerald Stew says:
6 November 2014

I am old enough to remember when most people were paid cash in hand at the end of a weeks work.We were then forced to accept monthly pay direct into a bank account. As a union rep. at the time, I argued that the day would come when we would have to pay to collect our own wages. Are we not close to that now.
Also,my son is a self employed graphic designer.A large proportion of his work is from a company based in New York who insist on paying him by cheque.It costs him eight pounds every time he pays in an American cheque.Why???