Banks are jeopardising the success of no-frills bank accounts set up to help vulnerable and low-income customers by cutting back on the services offered through them, a report has warned.
Consumer Focus called for banks to voluntarily agree a minimum set of standards for basic bank accounts, which are held by a fifth of the adult population as their only or main account.
The accounts were set up nine years ago to allow "unbanked" consumers access to mainstream banking by making it easier for them to have an account which they can use to pay in wages and any benefits.
But the report said "dark clouds" are gathering for the future of basic bank accounts and without intervention the banks could start a "race to the bottom", resulting in less useful and more costly accounts for those who are already struggling to get by.
There are an estimated 8.4 million basic bank accounts in the UK and they are growing at a rate of more than 500,000 every year.
But Consumer Focus said banks are wary of increasing their market share of such products because they tend to be less profitable. They are used by people who do not necessarily meet banks' minimum criteria to open a personal current account, possibly due to a poor credit history, and they generally come without overdrafts and chequebooks.
The document, titled the Best of British Banking, comes after Royal Bank of Scotland Group, including RBS, NatWest and Ulster Bank, joined Lloyds Banking Group in withdrawing access for basic bank account holders to the Link ATM network.
More recently, the Co-operative Bank stopped offering bank accounts to undischarged bankrupts, leaving Barclays as the only provider to this customer group.
The Co-operative Bank said it would review its decision to stop offering basic bank accounts to new customers who are undischarged bankrupts if the rest of the industry does more to create a more level playing field.
It said it had been forced to take the "difficult decision" not to accept any more of these customers because it was unable to sustain its own disproportionate share of them.