Free current accounts 'cannot last'

The notion of free current accounts is "unsustainable" and may increase the risk of future mis-selling scandals, a report argues.

Compiled by financial services firm PwC, the report said that while two-thirds (62%) of consumers say they are not prepared to pay anything for their current account, a "clear majority" (66%) are also aware of hidden current account charges.

Fewer than one in three customers surveyed said they trust their bank and around half would be likely to switch bank if an up-front fee was introduced instead.

The report argued that in reality, current accounts are not free at all as they are funded through overdraft charges, penalty fees and uncompetitive or zero rates of interest.

The system results in some customers cross-subsidising others through the charges they pay. The report, titled There's No Such Thing As A free lunch, said that the industry must move towards a more transparent fee structure.

Steve Davies, retail banking leader at PwC, said: "The irony is that most customers understand the unspoken bargain operating here and prefer it to paying an up-front fee.

"However, the free current account results in some customers being served at a loss to the bank. A more sustainable approach is that customers are asked to pay a fair price in return for reasonable services, which would reduce the risk of banks seeking to recover these costs by selling other products and services that the customer may not want or need.

"We can trace the history of this problem through the various mis-selling scandals in the industry over the last decade."

The report, which was based on a survey of more than 2,000 people, found that 17% were willing to pay less than £5 a month for their current account, 10% would pay between £5 and £10 a month and 5% would pay £10 to £20 a month. A further 1% would pay between £20 and £40 a month.

If people had to pay for their current account, the most popular services they would like in return were cashback on household bill payments, free overdraft facilities and a higher rate of fixed interest for the life of the account.

Mr Davies said that an individual bank could risk being "left on its own" and at high risk of losing customers if it decided to remove its free banking products.

He continued: "It is possible that the regulator could intervene ... However, despite the principles and benefits, it seems unlikely that regulators will intervene, not least due to the overwhelming customer sentiment on the subject."

Mr Davies said: "The most likely outcome is the gradual decline of the free-if-in-credit bank account model.

"Packaged accounts may gain some ground, but there will also be a move towards tiered pricing and the retention of a very basic free product.

"We are also likely to see innovative new digital models that challenge the current account approach which may come from technology companies, mobile providers, payments companies or a combination of these."

Concerns about the current account market were raised last year by consumer group Which?, which highlighted a ''worrying lack of innovation in products and service'' and said that consumers often find it hard to calculate charges and compare accounts.

Figures released by the Payments Council last month showed that 1.16 million current account customers switched their bank or building society last year, marking a 12% increase on 2013.

The figures released by the payments body suggested that Santander's 123 current account, which does charge a monthly fee of £2 in return for cashback on household bills and interest of up to 3% paid on balances, had made particularly strong gains in attracting customers since new rules made the process of switching current accounts easier.

New industry-wide rules were introduced in September 2013 which cut the length of time it takes to switch current accounts from up to 30 working days previously to just seven.

Outgoing and incoming payments are also now automatically moved over to the new account and the customer is guaranteed not to be left out of pocket if something goes wrong with the switch.

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