February 20, 2007 | posted by Pam Atherton in Banking |

The end of free current accounts must surely be nigh.

In one of the more bizarre stories in the weekend’s personal finance press, Robert Watts of the Sunday Telegraph wrote on how the US credit card provider, MBNA, is charging its customers for having a credit balance - yes, for being in credit.

The story brought home just how desperate the banks must be to find new ways of charging us for the honour of handling our money.

Having a credit balance on one’s credit card can occur quite easily. It could be that you over paid by mistake or the credit card provider made a mistake. Either way, to be punished by your bank for having a credit balance smacks of rank stupidity.

In the case in question, the customer said that as far as she was concerned the credit card account had been closed several years earlier and that the statement showing the credit balance had been redirected to her from an old address.

So it was by sheer chance that she received MBNA’s breathtakingly cheeky letter telling her that unless she cleared the credit balance on her card by the end of March, she would be charged £10.

The woman unsurprisingly said: “When I first read it, I just felt it was a bloody cheek,” and that she would move her business elsewhere.

Sadly, this may have been the response that MNBA wanted. Banks are not charities and simply don’t want customers they cannot make money out of, or in some cases, customers who are just too troublesome. If you complain about your bank to the Financial Ombudsman Service, the likelihood is that your account will be closed.

What this story shows is the desperation of the banks to find new sources of revenue in what is becoming a more difficult trading environment for them.

The Office of Fair Trading has called for a competition enquiry into the competitiveness of the market for payment protection insurance which may lead to a mis-selling enquiry. A number of banks have already been fined for poor sales practices in connection with PPI and thousands of clients are expected to receive or claim compensation, or at least a refund of their premiums.

Elsewhere, the banks are under fire for charging exorbitant fees on credit cards and bank accounts for common customer misdemeanours such as exceeding credit limits, going overdrawn, late payments and bounced cheques.

Ever since a ruling from the OFT (www.oft.gov.uk) last April which found that credit card penalty fees were ‘unfair,’ thousands of disgruntled bank and credit card customers have been extracting refunds of thousands of pounds from banks for charges which customers can prove were disproportionate to the amount of work involved.

For instance, banks typically charge about £30 a day if you fall into an unauthorised overdraft, and a similar amount each time you make an unauthorised payment by debit card or cheque, even though the actual cost to the bank of administering these transactions is around £4.50, according to the BBC’s Money Programme (www.bbc.co.uk/money).

Which?, the consumer group (www.which.co.uk), says that banks make about £4.7bn from these default charges each year, even though the Banking Code (www.bankingcode.org.uk) requires banks only to pass the administration costs of such transactions onto their customers.

Some industry analysts claim that banks have paid out £40m-£50m to customers in compensation already and that they are bracing themselves for a flood of further claims which could reach a million in 2007.

If this is true, it is small wonder that credit card providers are trying to unearth new ways of making money out of their customers. The same applies to the high street banks, some of which are starting to make a charge for current accounts, even for those customers who remain in credit.

This will mark a radical change in retail banking in the UK which to date has been one of the few countries in the world where free banking has been generally available.

Most European countries, America and Australia charge a monthly fee for holding a current account, as well as charging for individual transactions. Spanish banks, for instance, charge for every bank service you could care to mention, even when you’re in credit.

With the UK’s retail banking model depending heavily on delinquent customers subsidising the solvent, those in credit get a pretty good deal and can earn interest on their current accounts of around 1 per cent below base rate, with all standard transactions (direct debits, standing orders, cheque clearance and cash withdrawals) being free providing you’re in credit.

So will solvent customers be prepared to give up the status quo in order to subsidise banking services for delinquent customers? I think not.

Aware of this, a number of high street banks are looking at ways of shifting the current cross subsidy which exists between delinquent and solvent customers, but in a way that creditworthy customers might find acceptable.

So what are the options?

Charging all customers on a fee per transaction (pay-as-you-go) basis is one option. Charging tiered fees according to the level of your bank balance is another.

Others may adopt First Direct’s Bogof (buy-one-get-one-free) model whereby you are allowed free current account banking, providing you buy another of the bank’s products or services, or deposit at least £1,500 a month into your current.

Or what about all customers paying a flat fee, irrespective of their credit status, in the interests of simplicity? Or will ‘premier accounts,’ - monthly fee charging accounts which come with a package of ‘free’ extras, such as roadside cover and travel insurance – become the norm?

Halifax launched its first premier account this week (19 February) which costs £10 a month with 6 per cent interest on credit balances of up £2,500.

The free extras include worldwide multi-trip, family travel insurance, RAC breakdown cover, £300 interest free overdraft, home emergency cover and discounts for various insurances and retail outlets.

Meanwhile, First Direct will start charging its current account customers £10 a month from March, unless they meet the criteria mentioned above.

Charging a flat monthly fee or dressing up fee-paying accounts as premier accounts look set to be two of the models for the future. Which of these models becomes more prevalent remains to be seen.

Either way, free current account banking could become a thing of the past, apart from a few niche players.

Angela Knight, the income boss at the British Bankers’ Association (www.bba.org.uk) hinted this week in a Radio 4 Today programme interview that any crackdown on fees could spell the end of free banking in the UK.

Given that Barclays alone made record pre-tax profits of £7.14bn in 2006, it is unlikely that the banks are going to give up this level of profits without a fight, so Ms Knight, regrettably, may well be right in her prediction that the end of free current account banking is nigh.

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