Banks' £152 a year from each customer

By JONATHAN PRYNN FOR MAILONLINE
Updated: 10:47 EST, 30 July 2008

High Street banks make £2.6bn a year from overdraft charges on 'complex and uncompetitive' current accounts, a report said today.

Opaque: Banks are using hidden charges to profit from customers

The biggest investigation yet carried out into Britain's most widely used financial services product found banks make an average of £152 a year per customer - mostly as charges and interest earned on balances in accounts.

The Office of Fair Trading concluded that customers found it difficult to understand the charges and to compare different banks' accounts.

The OFT, which has already brought a High Court test case against 'unfair bank charges' currently under appeal, said the 'status quo is not satisfactory' and threatened more action if banks did not overhaul current accounts.

John Fingleton, chief executive of the Office of Fair Trading, said: 'This market is not serving customers well. 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.'

The report found the current accounts industry is hugely profitable for the banks, generating £8.3bn, more than savings accounts and credit cards put together.

There are 54m active accounts, but almost nine out of 10 are paying interest of 0.5% or less on credit balances. This allows the banks to make a huge profit by lending the money on at higher rates.

The OFT estimates that banks make more than £4bn a year from this, subsidising so-called 'free banking'. More than 6.6m paid at least £100 a year and 1.4m at least £500. In total 12.6m paid at least one charge. Charges, which can be as high as £39 a day, rose by 17% in real terms between 2003 and 2007.

But despite widespread dissatisfaction only a tiny minority - 6% - of customers switch banks, mainly due to 'complexity and lack of transparency', according to the OFT.

Michelle Slade, of online price comparison website Moneyfacts.co.uk, said: 'The big-name banks have for a long time relied on brand and customer loyalty. Many consumers think that it is too much hassle to switch accounts, particularly as many of us have numerous direct debits. However, nearly all institutions have a "switcher" service.'

The British Bankers' Association said: 'Banks are keen to ensure customers can continue to use their current accounts for day to day transactions without paying fees - as more than four out of five do now. In the UK customers do not pay a fee for their normal banking services.

'This model is recognised as being one of the best in the world as elsewhere it is common to have to pay for cash machines, direct debits and more.'

Key criticisms in watchdog's report

• Poorer 'vulnerable' customers are subsidising richer ones because they tend to shoulder the most charges for unauthorised overdrafts.

• Fees are unclear, making it hard for customers to compare one bank's current account with another. This reduces the incentive for banks to compete against each other.

• Fees are too complex, so customers are often in the dark about when they will be incurred until they turn up on their statements.

• There is a 'general and valid perception' that switching bank current accounts is 'both complex and risky'.

• The market share of the 'big four' high-street bank groups has barely changed at around 65% since 1999.

• Only 13% of customers have switched current accounts in the past five years compared with 54% for gas and electricity and 38% for mortgages.

• Around 90% of accounts with the big four pay 0.5% interest or less.

• The effective interest rate on unauthorised overdrafts is 220% if all charges are included.