Do free bank accounts actually come with a hidden fee?

11 January 2012

cashpointHere at Bitterwallet we are fans of the Good Deal. We are aficionados of the Bargain and lovers of the Freebie. We are proponents of that laudable aim of Getting Something for Nothing.

Banks, on the other hand, are few people’s favourite Aunt. They take your money, lend it out at a profit and then want to charge you for the privilege? That does not sound like a Good Deal, particularly when you can get free accounts. Of course, many banks now offer sweeteners with their paid-for bank account packages, things like breakdown cover and travel insurance, but a savvy Bitterwalleteer with a calculator can work out whether the benefit is worth the cost. Or can he? In recent months, there has been a lot of chuntering going on around the topic of free banking - or to be precise, whether 'free' bank accounts actually exist.

Recent research by Defaqto showed that more than half of bank accounts on the market now charge a monthly fee, with 17% of active current accounts being paid-for. But the majority of people still object to the idea in principle. Our good friend Branson was recently forced to make a U turn after proclaiming that Virgin Money (proud new owners of the Government-rescued Northern Rock’s retail banking operations) would charge £5 a month on all its new bank accounts.

But the Virgin Money story reveals the sting in the tail. Virgin Money will now offer a 'free' version of its account alongside its paid accounts, but the fees for things like unauthorised overdrafts and bounced payments will be higher, Branson grumbling that the word 'free' should have quotation marks around it because of the 'hidden' charges associated with many accounts.

Mike O'Connor, chief executive of Consumer Focus told the BBC that the "perception" of free banking is not good for competition.

"It is great not to have to pay for a bank account, but is not necessarily good for the consumer in the bigger scheme of things," he says. "Bank accounts are paid for by people who make mistakes and go overdrawn - they are often the least well-off and the least well-informed."

So is free banking free? Do you ever get something for nothing?

A banking expert at Think Money said: "Paying for a bank account may seem pointless to some people - especially those who like to earn interest on their money - and it's true that if you're careful with your money, you need never pay any fees or charges for a bank account. But most 'free' bank accounts charge hefty fees for accidental overspending or missed payments, which can be annoying for some and devastating for those who are already struggling financially. Many paid-for bank accounts don't charge in this way, meaning they could actually leave some people better off."

So if you are bad with your money, you would be better off paying up front? Perhaps. But isn’t all this adjusting of rates and stuff, well, all a bit underhand? Not that we shouldn’t expect as much (or as little) from the banks.

In September, the Independent Commission on Banking, the Vickers report came up with a recommendation that customers' annual statements explain the amount of "interest foregone" by a customer or, in other words, the price of having a current account rather than a savings account.

Interest foregone is calculated by subtracting the amount of interest earned from a current account from the amount of interest that could be earned had the consumer put his or her money in an account which earns higher interest, or put some of that money in savings. This would mean that customers would know whether they would have earned more interest elsewhere (or paid less), and crucially, whether this would mean paying a monthly fee would have meant they were better off.

But regardless of what is best for you, the banks are thinking of what’s best for them, namely your money, and are doing their level best to attract new customers by offering bigger and bigger incentives to switch - with a bit of a frenzy of offers introduced in January.

Customers are no longer to be fobbed off with a piggy bank or £5 gift voucher. Now, for example, the Halifax is offering £100 to new customers at the start of the switching process, HSBC is offering 6% interest for 12 months in its current account "January sale". The Co-operative Bank is doing the opposite and dropping overdraft charges for existing customers for three months to try and keep them.

Now all you need to do is sit down with a sheaf of figures, a programmable calculator and a wet flannel to see who ends up being the financial winner. My money’s on the banks.

TOPICS:   Banking


  • Me
  • Idi A.
    Hey great! So if we all pay for our current account, the banks WILL reduce overdraft fees, scrap currency exchange charges, not charge for paper statements after you were urged to opt out of receiving them "to help the environment", and they WON'T just trouser the extra bunce in profit-related bonuses? Hanging's too good for the fuckers.
  • A w.
    Manage your money properly and live within your means. We're just doing Satan's job for him really; if you don't sin then you won't burn.
  • callum
    Idi Amin - They do already if you use your brain when deciding what account(s) to get. Santander offers a free overdraft for a year, Norwich and Peterborough don't charge currency exchange charges (nor do my Halifax and partially my Nationwide credit cards). I don't get charged for paper statements by anyone. The moral of the story is - if you're an idiot and/or lazy, you'll be stung. If you have a few brain cells and are willing to spend half an hour researching your finances then you'll get everything (realistically) that you want for free. The big question being, should we legislate to protect the idiots and lazy people at the expense of the people with vague levels of common sense. As I fall into the latter, I say no!
  • Nick T.
    @ A Banker You're gonna fry first pal, and well be cheering along. The hypocrisy of this blatant kite-flying by the banks is that if you DO look after your money and you DO live within your means the banks are still trying to force everybody (by stealth) to pay for having a current account because there is no alternative to having one. This year it's free if you have your wages paid into it or keep over £1500 in there, but next year...
  • Idi A.
    Thanks Callum. So are you seriously suggesting that if the banks start charging and come into a shitload of money they'll pass it on by reducing charges, which was my point? Have they ever? As for paper statements, try opting out (as encouraged by the banks), then try applying for a mortgage where the lender asks for your six most recent statements - on paper. Some banks charge up to a tenner a pop.
  • callum
    Yes, I think they would. That's what banks in other countries do - and if one bank does it then the others need to compete. Granted, I doubt they'd change them to reflect the actual cost to them, but I'm sure they would be lower. With the paper statements, that would be incredibly annoying I agree! Which bank are you with? I have several accounts and I've never seen any of them mention fees for changing back to paper statements.
  • Avon B.
    @ callum
  • corbyboy
    So which paid accounts don't charge you for unauthorised overdrafts?
  • callum
    None I assume. For starters, I said the fees would reduce, not disappear, and more importantly, paid accounts in the UK aren't comparable to paid accounts abroad - which is what people generally compare them to. In many countries, you have to pay for what we get for free (i.e. just a plain current account). In the UK, if you choose to pay you will get a load of extras like insurance, music downloads, film rentals etc.
  • Richard
    So benefit claiming chavs who don't bother checking the fees for using overdrafts and think that they can spend another grand or so getting the latest iPhone without any ramifications are funding free accounts for hardworking people who live within their means... seems fair to me :-)
  • Jeff C.
    The rich get richer. I have recently gone from using a debit card for transaction. Instead, I now use the credit card, get rewards, and pay off my bill right away. NO FEES. It has been working great for me.
  • Alexis
    It's a two way process. If you borrow from them by means of an overdraft it seems fair to pay. If you lend them money by being in credit why on earth should you have to pay them? They already pay you a small amount of interest. This is personal banking though - there is no such thing as free business banking after 2 years.
  • Spanks
    Quite an interesting read, ta. Personally I pay for one account due to the associated perks, however I have another 4 free personal accounts with the same bank which benifits from the one account being premium. Actually value for money for me.
  • JonB
    I have a current account linked to an offset mortgage account so all the money I have in there is effectively earning interest at the rate of my mortgage. I don't pay any fees, have a free agreed overdraft of up to £1k and access to all the facilities normally expected with a current account.
  • Personal B.
    To me, it is just the same as looting.
  • Mike H.
    It's thanks to the chavs who piss their overdraft up the wall that people who are careful get free banking, thanks 'the chavs' thanks.
  • Dick
    I lived in Italy for six months whilst working there, and had to pay for a bank account. It was about £2 per month (fixed fee, not percentage of money in account). But I also had to pay for a cashpoint card (another £2 per month) and again if I wanted a VISA card, pay if I wanted to pay in a cheque (about £0.50), or have a cheque made out (about £3). A cheque book of 50 cheques was about £25. And that was the best offer I had as a foreigner with a short fixed term contract.

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