Uncompetitive rates and a lack of transparency mean that just 6% of customers have switched their current account provider in the past 12 months, according to a damning new report from the Office of Fair Trading (OFT).

The consumer watchdog’s investigation into the £8 billion current account market found there is little incentive for people to switch provider, and those that do shop around risk bearing the often huge associated cost.

It seems that banks are relying on customer inertia – and confusion – when it comes to current accounts. There certainly is a lot at stake; the OFT concludes that banks make more profit from current accounts than from savings and credit cards combined. And most of the money comes from charges levied on people with insufficient funds and overdraft charges.

Another shocking finding in the report is that three-quarters of people don’t know the interest rate on their current account while a significant amount don’t know how much they pay in overdraft charges.

All this means that perhaps it is time for you to review your current account – and think about switching.

Is the market uncompetitive?

The OFT says the market is uncompetitive because banks have no incentive to offer better rates to customers. The banks deny this – Lloyds TSB says there are over 100 different accounts from 29 different providers, with many paying “extremely competitive” rates of interest.

The British Bankers’ Association – which represents banks – also claims the sector is open and competitive.

But experts from price comparison websites and other data providers are not so sure.

Michelle Slade, analyst at Moneyfacts, says big banks rely on brand and customer loyalty to get customers – rather than tempt people in with attractive deals.

“The fact that these institutions pay no or little credit interest is disgraceful. With inflation as high as it is, anyone with money with these banks is effectively losing money,” she adds.

For example, Barclays, First Direct and the Co-operative Bank fail to pay their current account customers any interest, while the Royal Bank of Scotland and NatWest pay just 0.1% on a gross basis, according to Moneyfacts.

Slade adds: “Many consumers think that it is too much hassle to switch accounts, particularly as today many of us have numerous direct debits set up from our accounts. However, nearly all institutions have a switcher service, which transfers your direct debits for you, taking the stress out of switching accounts.”

So, where should you be moving your money?

Before you think about changing provider, think about what you require from your current account. If you are mainly in credit, then take a good look at the interest rates offered by banks to ensure you make the most of your money. However, if you often go overdrawn then it’s worth taking into account what an arranged overdraft will cost you and what charges your provider will hit you with should you go over this agreed limit.

Also, bear in mind other charges your current account provider levies – for example, are you happy to pay for a packaged account, and will you be charged for a bounced cheque?

If it is interest rate you are after, then one of the best rates is from Alliance & Leicester. The bank’s premier direct current account pays 8.5% AER on balances up to £2,500 or 0.1% thereafter. Be aware, though, that this is just an introductory rate for one-year and you’ll need to pay in £500 each month.

This account will not charge you any interest or usage fees on arranged overdrafts for 12 months, but after that time the usage fee is 50p a day up to £5 a month.

Alternatively, Abbey offers a current account (credit option) paying 8% AER on balances up to £2,500 for 12 months. Anything over the amount, and your interest rate will fall to 2.5% AER.

This account requires you to pay in £1,000 a month. It offers an interest-free overdraft for the first four months, or you can opt for a three advance overdraft for 12 months. If you choose this latter option, however, be aware that after 12 months you will pay an overdraft rate of 12.9% AER (variable) and your in-credit interest rate will drop to just 0.1% AER.

Finally, Coventry Building Society’s First current account pays 5.6% AER up to £250,000, including a 12 month bonus of 0.85% AER. You’ll need to pay in £1,000 each month otherwise your interest rate will drop to just 0.95% including the year one bonus.

This account provides customers with a £250 interest-free overdraft designed to act as a buffer in case you go overdrawn. If you exceed this amount, you will be charged £25 a month.

Overdraft fees

The OFT is currently in the midst of a legal battle with Britain’s biggest banks over overdraft fees. Although the High Court ruled earlier this year that the watchdog has the right to decide whether fees are unfair or not, the banks involved appealed this decision and the case rumbles on.

“The OFT’s research does not really tell us anything we didn’t know already in that it is those that fall foul of the providers’ complex and punitive charging structures that end up providing free banking for the masses,” says Andrew Hagger of price comparison site Moneynet.

He advises people to check what their current account provider will charge them should they drift into the red without prior permission.

A £200 unauthorised overdraft over five days would set you back a total of £115.53 if you bank with Lloyds TSB, or £50 if you bank with Alliance & Leicester, according to Moneynet.

Further examples are displayed in the table below:

• OFT
• current accounts
• bank charges