Bank accounts aren’t free, so why don’t we pay upfront?

The vast majority of us operate our bank accounts under a free-in-credit model. If your account has a positive balance, you won’t pay a penny.

However, if you head into the red you will start to incur charges. This may be due to interest paid on an authorised overdraft, or fees paid for entering into an unauthorised overdraft. Or you’ll get hit by charges for using your card overseas, or to pay for money transfers. Not so free anymore eh?

Do you pay for your bank account?

And for those of us still sitting pretty with a positive balance, it isn’t all smiles. Are you earning any interest on that savings’ balance? Who gets that money? Free isn’t starting to seem so free any more is it?

Indeed, in 2008 the Office of Fair Trading found that people paid on average £152 a year for their bank account. And the bulk of that sum comes from the lack of interest you receive on your money.

When you think about it though, it makes sense. There’s no such thing as a free lunch and neither is there such a thing as a free bank account.

Current accounts have to be paid for somehow. There are clearly costs involved – operating branches, stocking ATMs and processing direct debits all cost banks money and these costs are passed on to us.

The trouble is, because these costs are all passed on via small print charges and the interest you miss out on, it’s not easy to figure out how much you’re paying and whether you could get a better deal elsewhere.

The illusion of ‘free’ banking

And the banks aren’t doing much to illuminate the situation. When a recent Parliamentary enquiry asked them how much it costs to provide current accounts, senior figures from the big banks weren’t able to answer.

Yet, when attempts are made to toughen up on consumer protection, such as moves to limit unauthorised bank charges, the banks threaten ‘the end of free banking’ and a new world where we’ll pay upfront for bank accounts.

But is that threat just a big game of bluff? The current system suits the banks down to the ground. It lets them hide their charges and avoid competing on value.

So maybe we should wonder whether upfront charges could actually make the banking system work better. After all, it would make us start paying attention to what we are paying, and show us when banks aren’t giving us a good deal.

Would you prefer an upfront charging model where all bank account fees are clear and transparent? Or would you like to keep the current model and retain the illusion of ‘free’ banking?