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By Sarah Modlock
Although the UK is one of the few European countries that can still boast of free banking, Packaged accounts - also called 'premium accounts' - which generate £530 million a year in fees alone, offer several types of perks. Some are free, subject to the monthly fee, but others have to be purchased at an additional cost with the benefit of a very small discount. For instance, you might pay £6 a month for your account but get 'free' travel insurance or commission-free currency exchange, retail discounts, a 24-hour legal helpline (intriguing) and a personal bank manager and then be offered preferential rates for an overdraft. But do the products and 'perks' actually get used? Around three quarters of account holders make use of them but of those that do not bother, most said they already had similar products and some did not consider them to be comprehensive enough. These are key issues to consider if you are thinking of signing up to a packaged account. What are you actually getting for your money? Travel insurance is one of the most popular giveaways and it is something that most of us need at some stage during the year. But you're going to have to read the small print to know whether your freebie will do the business if something happens on your holidays. Generic products are unlikely to cover you for something like skiing and may not have sufficient protection for trips to the US, where medical treatment costs are high. Don't assume all cover is the same. Cross-selling Despite the cost and the number of people that do not use the benefits offered with these accounts, the market has shown a steady growth by around 2% each year since 1998 (from just 6% of the total current account market) to 20% in 2006. Figures from Engage Mutual show that one in nine of the UK's forty million current account holders pay a monthly fee for packaged accounts, costing an average of £10.04 a month, or £120.48 a year. Banks must be delighted because a customer who pays for one service is likely to pay for another. The uSwitch research shows that three quarters of packaged account customers are cross-sold other financial products using this tactic. Savings accounts are the most popular product to be cross-sold with more than a third of customers opening one as a direct result of having a packaged account. Almost a third are lured by an overdraft and just as many by travel insurance. Card protection is high on the list with nearly a quarter of people taking this out closely followed by credit cards. Nick White of uSwitch comments: "In effect, packaged accounts are allowing banks to charge customers for the privilege of being cross sold additional financial products. From a consumer's perspective, it's all too tempting to have several financial products with the same provider and as a result of this, banks are profiting from people's inertia and lack of time to shop around for the best deal. Just because banks claim to offer customers a discount if they take out additional financial products it doesn't mean it's a best buy deal or the best option for the individual." As well as using packaged accounts as a cross-selling vehicle, one of the reasons eight million people in the UK have one is because of the underhanded tactics used by banks, says uSwitch who say they found that 1.3 million people do not have their account through choice but have instead believe they have been 'automatically upgraded' by their bank. For more than a third of packaged current account customers, the sole reason they have one is because their bank persuaded them to do so. Persuasion is one thing but uSwitch says that if banks really are automatically upgrading customers to packaged accounts then this is unethical. "We all know that many packaged account customers do not use all if any of the benefits on offer but this is hardly surprising if so many people do not consciously decide to take one out," says Nick White. These customers are losing out on several levels because not only are they paying for benefits they don't use, the in-credit interest rate is on average a paltry 0.98% AER." The end of free banking? So are there any redeeming accounts which are worth the fee or is the concept flawed? Stuart Glendinning, managing director at moneysupermarket.com is not a fan: "So far packaged current accounts have proved more popular with the banks than with customers, primarily because they represent a product that can be up-sold to existing customers that, prior to this, were not paying a fee. Links and discounts are also available for further bank products encouraging more sales and thus margins are improved and profits rise. To date not many customers have actively sought a packaged account because, in the main the benefits are superficial are not worth the monthly fee. He does highlight HBOS and says it appears to making a greater effort with its new Ultimate Reward Current Account account, with some worthy benefits such as worldwide family multi trip travel insurance which includes ski cover, AA roadside recovery and 24 hour emergency home assistance. "Unfortunately HBOS can't resist the temptation to add loads of fluffy meaningless benefits like the other banks but that aside the benefits are substantial," he says. "moneysupermarket.com shopped around for the best rates on the internet for some of the core benefits and we found it hard to beat this level of services for the annual fee of £120 per annum that will be paid for the packaged account. However, many people will not want the services offered and consequently the packaged account will be of no interest. But for families with cars who holiday regularly and sometimes go skiing this looks like a good buy." Glendinning believes that free banking may soon be a thing of the past: "It is not obvious to me why the existing Office of Fair Trading investigation into bank account charges cannot take into consideration all aspects of the current account proposition, including the fact most customers benefit from free banking. Free banking is on the way out anyway through the hard sell of packaged accounts and the selected targeting of profitable customers as manifested by First Direct [introducing mandatory account fees] late last year." Defaqto's Head of Banking David Black warns the likelihood is that free banking will end with banks offering deals based on how much a customer uses their account and what facilities they take."Longer term I still regard it as inevitable that the days of free in-credit banking for personal customers are numbered." Useful links: |
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