Is this the end for 'free' banking?

Has 'free' banking had its day? Merryn Somerset Webb investigates, and looks at the best bank accounts for those willing to pay.

Do you want to pay for your bank account? If the answer is no, you aren't alone, says Neil Collins in the FT: "neither do 62% of those surveyed by PricewaterhouseCoopers (PwC)".They want their bank accounts to stay free. After all, why pay for something if you don't have to?

But, as Izabella Kaminska points out, also in the FT, the "problem with free banking is that it isn't free". Cashpoint networks, debit cards and cheque books all cost money, and someone has to pay for them.

That someone is generally financially hapless: one person's overdraft fees at 20% can finance many other accounts; or it's the saps who take out paid-for Gold, Platinum or other prestige accounts. Here, the costs of running the accounts are shifted into offering 'benefits' that most people never use, such as identity fraud insurance.

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Finally, of course, not charging for basic services has meant that the banks have felt forced to find "creative ways to cover costs", says Kaminska. Hello "ratcheting up risky loan portfolios" and "flogging insurance products that most customers didn't need or want".

Stealth charging isn't the only problem with free bank accounts. Virgin Money claims the current system is "stifling UK competition" by making it hard for new entrants who can't afford to offer free accounts to break into the market.

So how can things change? The banks worry quite rightly that any attempt to alter free banking will see them lose market share fast. So what's to be done? PwC's Steve Davies thinks that the only way to resolve the situation is for the banking regulator to step in and allow all banks to introduce charges simultaneously (without the banking regulator involved it would be collusion).

This will happen one day. But until then, those looking for a bank account who aren't likely to be overdrawn and who also aren't likely to be lured into getting a gold account should make the best of a pretty good situation. Take Santander's 123 current account, for example. This isn't free it charges you £2 per month. But it more than makes up for that by offering interest rates of up to 3% on cash held in the account (up to £20,000) and cash back on household bills.

Lloyds also offers a good deal. As long as you pay in £1,500 per month, the Club Lloyds account will pay interest of up to 4% (when your balance is between £4,000 and £5,000). A £5 per month fee applies if you don't pay in the £1,500. For lower earners, the Halifax Reward account charges no fee and gives you £5 per month if you pay in £750. All three accounts also require two direct debits to be active in order to get the interest.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.