Current account market failing consumers
The current account market is not working well for consumers, with banks profiting from customer confusion by offering dismal deals.
That is the conclusion of a damning new report from the Office of Fair Trading (OFT) into the £8 billion current account market. It slams the market as complex and lacking transparency, which together make it extremely hard for people to compare bank accounts.
There is not enough incentive for people to find a better deal, and those that do shop around risk bearing the huge resulting cost, it adds.
The OFT investigation into current accounts found that a significant number of customers don’t know how much they pay in bank charges, while three-quarters of people have no idea the credit interest rate on their current account. Even those that do, lack the means to be able to calculate the interest they forgo, the OFT warns.
As a result, just 6% of customers have switched current accounts in the last 12 months – one of the lowest switching rates in Europe.
The OFT also reveals the way banks profit from current accounts. It discovered that 81% of banks’ current account revenue comes from “opaque” sources - £2.6 billion from insufficient funds charges and £4.1 billion from net credit interest income. In total, the market is worth over £8 billion, equal to £152 per active account - meaning current accounts generate more revenue for banks than savings and credit cards combined.
The OFT is currently fighting a legal battle with banks over the issue of current account overdraft charges. Although the High Court ruled that the OFT has the right to decide what a fair overdraft charge is, the banks involved in the case have appealed the decision.
John Fingleton, the chief executive of the OFT, says: “Customers lack the information they need to choose the best deal, and this in turn weakens the banks' incentives to compete. There is much the banks could do to improve how the market works, and we hope this report will encourage them to take steps to do so in the near future.”
Banks have hit back at the report. Lloyds TSB denies that there is not enough competition in the current account market.
Catherine McGrath, director of current accounts at Lloyds TSB, says
there are over 100 different accounts available from 29 different
providers, with many paying "extremely competitive" rates of interest.
"Over one million people joined Lloyds TSB last year and research that
we conducted showed that of people who had switched their current
accounts, 79% found it to be easy," she adds.
Other findings in the report include:
• Around 1.4 million customers - many vulnerable and on low incomes - pay over £500 a year in charges.
• Over 12.6 million accounts (23% of active accounts) incurred at least one insufficient funds charge in 2006. People who incur a charge are more likely to incur six charges than just one.
• Four million accounts incurred charges of over £200 in 2006, of which 1.4 million incurred charges of over £500.
• Insufficient fund charges increased by an average of 17% between 2003 and 2007.
• There is “significant” potential for errors in the financial management of current accounts, which could result in hundreds of pounds of charges.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.