Do free bank accounts actually come with a hidden fee?
Here 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.