Free banking could ‘disappear within two years’

Defaqto predicts banks will switch to ‘Pay As You Go’ charges or flat fees for current accounts.

Free banking for all could disappear within two years as part of a backlash from banks against consumer and regulatory pressure on charges, leading financial research company Defaqto warns.

Instead customers will either have to pay a monthly fee for a current account or face ‘pay as you go’ charges based on how much the account is used and for what it is used. Customers issuing and receiving large numbers of cheques would, for instance, pay more than those relying on electronic transactions which are cheaper for banks to process. Banks may reduce some charges for customers who hold some of their other products.

Customers have enjoyed free banking on current accounts for the past 23 years but Defaqto believes the current backlash against charges for items such as overdrafts and bounced cheques plus investigations by the Office of Fair Trading into the level of those fees will prompt banks to introduce charges for all customers.

More than a million customers are reckoned to have downloaded standard bank charge complaint forms from consumer websites since November last year and the Financial Ombudsman Service is estimated to be dealing with more than 1,000 inquiries a day about bank charges.

David Black, Head of Banking at Defaqto, said: “I will be very surprised if free banking is universally available in two years time. Exceptions such as basic bank accounts for the less well-off will remain but the range of services on those accounts – they don’t for instance offer overdrafts – will not be suitable for most customers.

“The first major provider to introduce charges for all customers is going to take a lot of flak but it is likely that the majority of the main providers will then follow the lead. I would then expect to see a significant increase in account switching as well as many people closing their secondary accounts.”

He also believes that the introduction of universal charging will boost the profile and attractions of offset mortgages as well as the range of added value accounts available.

The banks’ arguments for the end of free banking focus on the fact that customers who go overdrawn are currently paying for those who don’t go overdrawn and that banks face costs in running current accounts for all. The UK is also unique in the world in not charging for current accounts.

Barclays chief executive John Varley has said his bank is “determined” to protect free banking but Nationwide Building Society’s new chief executive Graham Beale, who takes up his job on April 1, believes charging for current accounts is fairer.

Many banks already have significant numbers of customers willing to pay a fee for so-called added value accounts. Lloyds TSB has more than four million customers paying a monthly fee while Halifax has recently launched an account charging £10 a month.

First Direct began charging around 200,000 customers £10 a month for their current account from February 1 while Citibank is to move 150,000 customers from a free account to one charging £10 a month.