Is this the slow death of ‘free’ banking?

Bit by bit, banking extras are being cut back and new charges introduced

By Harvey Jones/ Express

The British have got so used to free banking that we take it for granted, but now it is at risk from death by a thousand cuts.

Free current accounts are under growing threat as banks reduce or scrap their special offers and rewards because of a combination of EU rules and plunging interest rates. If a panicky Bank of England cuts interest rates, despite growing evidence that the UK economy is still booming, bank customers will see their plight worsen. So are we witnessing the slow death of free banking and what will it cost us?

Bit by bit, banking extras are being cut back and new charges introduced. Last week, Halifax dropped the £5 per month it pays to Clarity cardholders with a current account at the bank.  Andrew Hagger, personal finance specialist at, says this is merely the latest card offering under the cosh, with Capital One canning its cashback scheme last year, RBS and NatWest pulling their YourPoints scheme, and M&S and Tesco Bank also reducing rewards.  The European Commission is largely to blame because of new rules reducing the maximum “interchange” fees that banks can levy each other for processing card transactions. Banks and card providers have reacted by scaling back or scrapping generous card loyalty schemes.  Now current accounts are also in the firing line as banks battle to improve their bottom line while interest rates head closer towards negative territory. Customers on the hugely popular Santander 123 account, which has attracted millions with its high interest rates and cashback on household bills, are already feeling the pain.

Hagger says: “In January, Santander hiked its account fee from £2 per month to £5, costing customers an extra £36 a year. Now it is reportedly reducing the account’s savings rate.” Santander 123 currently pays a market-beating three per cent on balances up to £20,000, but this may soon be cut to just two per cent, costing customers up to £200 a year. The bank said it would not comment on speculation.

Hagger says this is part of a wider trend where banks whittle away benefits and sneak in fees. “NatWest and Barclays introduced new schemes last year where customers could earn rewards, but only if they pay a monthly fee. This is becoming the norm.”  Many “packaged accounts” already charge monthly fees of between £5 and £25 for a bundle of extras such as travel insurance, car breakdown cover and mobile insurance. Damien Fahy, founder of, says these could be next: “It is far easier to hike existing fees than add new ones to a free bank account.”

If the Bank of England does cut rates to 0.25 per cent or even zeo, further cutbacks may follow. Fahy says: “Banks will earn less on their deposits and investments and will respond by slashing customer account benefits.” With former bank money spinners such as payment protection insurance (PPI) hit by costly mis-selling scandals, the banks have to make their money from other sources. Fahy says: “Some cash accounts and Isas already pay as little as 0.1 per cent and we can expect the situation to get even worse.”

There has even been talk of banks introducing negative savings rates, which would see them charging customers for holding their money. Last week, NatWest wrote to business customers warning of the prospect of negative rates, something that would be a serious blow if imposed on private savers. Fahy says: “If that happened consumers would simply withdraw their money and stick it under the mattress, as happened in Japan when rates went negative.”  Switching to a better bank account is easier under the new current account switch service, which allows you to move all your banking within seven working days.

DJB Research founder David Black says surprisingly few people have switched since the service was introduced three years ago, partly because many assume current accounts are free and all offer roughly the same deal: “It can be hard to choose a new current account, especially if you go into the red from time to time, given the plethora of different overdraft fees and structures.”

He adds: “It would be a significant shock if free banking disappears, but there may be one benefit; customers would be more willing to switch and this would help the new breed of challenger banks trying to win business from the big four.”  The truth is that free banking is far from free, with banks earning £8billion a year by charging for extras such as overdrafts, unauthorised transactions and foreign ATM withdrawals.

Hannah Maundrell, editor-in-chief at, says free banking has never really existed: “The Competition & Markets Authority has asked the banks to cap fees, but they still have plenty of leeway over what to charge.”  If your bank is downgrading your account benefits consider switching to a rival deal. The TSB Classic Plus, Nationwide FlexDirect and Tesco Bank current accounts are all popular.

Also, M&S Bank recently revived its offer of a £100 M&S gift card for new current account customers, plus £10 each month for a year to spend at the store.  Bank customers have to work harder to get a better deal and will have to work harder still if free banking is ultimately killed off.

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