'Free banking': Good thing or barrier to competition?

If you believe that there is no such thing as a free lunch, then you will certainly think the same is true of a current account from a bank.

The majority of customers do not pay a fee to their bank for the right to open and maintain a current account, but they are charged in other ways.

Interest rates are lower than the levels offered with savings accounts or official rate set by the Bank of England. Charges are levied for going overdrawn without permission or for making certain transactions.

Is this method of charging stifling competition and making it too confusing for customers who might consider shopping around for a bank account on the basis of price?

Or is it an acceptance that, unless they are offered added extras, customers have little appetite for paying a monthly fee to a bank for keeping their money safe?

'Perception'

The debate is not as clear-cut as you might think.

Mike O'Connor is the chief executive of Consumer Focus, which has considerable power to act on behalf of customers. He says 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."

He says that no bank has totally broken ranks. That may not be that surprising, given the relatively hostile reaction to suggestions that Virgin Money may charge £5 a month for a current account.

The provider, which is attempting to gain a foothold in the High Street with the purchase of the good chunk of Northern Rock, says that customers will get a choice between a fee-charging account and a "free" account when it launches a current account offering in 2013.

Soiled reputation

It is often said that people in the UK are more likely to change their partner than they change their bank.

A number of accounts offer extras for the busy customer - but for a fee

Even if you accept that people would shop around more if they could compare the "price" of an account, could banks really attempt to bring in a monthly fee for all current accounts?

Banks hardly have the best of reputations among the public at present. Add to that a whiff of suspicion about existing fee-charging accounts.

The City regulator, the Financial Services Authority (FSA) says that one in five UK adults has a packaged bank account.

These current accounts have a monthly fee because benefits such as insurance or ticket discounts are bolted on. Other common elements of the package are commission-free foreign currency, travel insurance, preferential overdraft deals, mobile phone insurance and breakdown assistance.

But the FSA wants greater checks to ensure customers are eligible and aware of the insurance elements of the bundle.

"We are concerned that it may be too easy at the moment for firms to sell customers something they do not understand or need," the FSA's Sheila Nicoll said in October.

'Transparency'

So, if "free" banking is unfair, and fee-charging accounts offer a pathway to mis-selling, then what can be done to allow customers to shop around?

The Independent Commission on Banking - the Vickers report - was published in September. It 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.

"Transparency must also be improved so that customers can identify the products that best suit their needs, forcing banks to offer the prices and services that customers seek," the report says.

That may still be somewhat opaque for the busy bank customer.

Andy Gadd, head of research at analysts the Lighthouse Group, says that price comparison websites can do the hard work for those looking to switch accounts to get the best deal.

"Comparing current accounts isn't necessarily easy but there are various comparison sites for those who want to review their banking facilities and find the best deal for their particular circumstances," he says.

"All individuals are different and the fact is that different current accounts are designed for different people - simply saying that all current accounts must charge a fee rather than paying interest will not change this and will actually disadvantage some."

'Firing customers'

While, it may disadvantage some customers, it could be good for the big banks, argues banking analyst Jonathan Charley.

"All of the big banks today have customers that they do not make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product," he says.

"The problem is that in today's banking environment it is very difficult for a bank to fire customers.

"However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance and low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere."

Meanwhile, the banks themselves are doing their best to attract the proactive customer by offering incentives to switch - with a bit of a frenzy of offers introduced in January.

Gone are the days or a free clipboard and pen. 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", and the Co-operative Bank is dropping overdraft charges for existing customers for three months to keep them on-board.

But anyone tempted by such offers needs to stay on their toes.

"Customers should consider whether, despite the initial tempting offers, these accounts offer value over time," says Kevin Mountford, at moneysupermaket.com.

So, it seems, customers will have to stay engaged and informed if they want to pursue the best banking deal.

Instead of simply looking at a headline price - as they do in a store - the current account shopper needs to sit down with a calculator, a computer, and a considerable amount of time.

The question remains - will they bother, or will they go out for lunch instead?