Get set for fee banking rather than free

Published on Friday 27 February 2009 19:35

THE great overdraft charges saga rumbles on but each step brings the end of free banking closer. On Thursday Britain's biggest banks lost their appeal against a decision allowing the Office of Fair Trading to decide whether or not charges on unauthorised overdrafts are fair.

The banks have said they will ask for another appeal, this time to the House of Lords. If that goes against them, the next court case could be to determine the level of charges that is considered fair by the OFT, which won a three year battle to impose a 12 cap on credit card charges in 2006. While subsequent cases are likely to give rise to further appeals, banking experts believe the days of free banking are now numbered.

It's estimated that a charge cap could cost banks over 2 billion a year in revenue and the need to recover the lost income stream could see more banks introducing charges for current accounts.

Andrew Hagger, head of communications at Moneynet, said: "We may end up with a situation where basic bank accounts are free, but for anything that offers competitive overdrafts or credit interest, you may have to pay for the privilege. Banks will want a regular and almost guaranteed stream of income – a bit like monthly fees on packaged current accounts."

A cap along the lines of the 12 limit imposed on credit card charges by the OFT in 2006 is one of two likely outcomes from the test case, believes David Black, principal consultant of banking at Defaqto.

The alternative is a graduated cap where the charge is dictated by the extent to which borrowers stray into unauthorised overdraft territory and how long they are there for.

"This method would see a small temporary unauthorised overdraft attracting a lower fixed charge than a more substantial transgression," said Black.

Other approaches to account charging likely to be considered include pay-as-you-go accounts, with fees levied on each transaction. Black also raised the possibility of discounts or fee waivers on charges for customers using other services with the same bank, or who keep to a predetermined credit balance.

Fee-based banking is already common in the UK, as most banks offer some form of packaged account. Often marketed as premium accounts, they tend to offer extras such as breakdown cover and travel insurance in exchange for a monthly fee. The average fee is currently around 13 after a gradual increase in recent months.

Bank of Scotland earlier this month launched a new account that may be a prototype for the kind of fee-based accounts that could become more commonplace. The account, adverts for which feature its 5 a month in-credit bonus, has no penalty charges or overdraft interest rates. Daily charges are used instead, such as 1 for going overdrawn up to 2,500 or 5 a day for exceeding the agreed limit. Whether this complies with the eventual OFT rules remains to be seen, but the account is structured in a way that generates significant revenue, said Hagger.

"It is clever because it looks good on the face of it and is transparent. But most people in overdraft are worse off under the fees applied."

The rise of such accounts suggests banks have pre-empted an anticipated loss of revenue from charges, according to Michelle Slade, analyst at Moneyfacts.co.uk. She pointed out that some banks, such as RBS and Barclays, have already moved to tier-based charges dictated by the cost of the item, such as unauthorised overdrafts.

"The option that some banks may now levy an account fee is a real possibility," said Slade. "Lets hope that the win for the OFT doesn't cause us all to pay an increased cost to cover the lost revenue of a penalty that was previously paid by a few."