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Banks battle it out for customers By Rob Griffin
A string of high street names, including First Direct, Alliance & Leicester and Lloyds TSB, have announced they are making significant changes to the way that many of their current accounts and overdrafts operate. According to Kevin But while levels of in-credit interest have been the focus of these marketing efforts in the past, banks and building societies now appear to be more concerned about preventing the Office of Fair Trading (OFT) imposing tough sanctions. Earlier this year, the regulator launched investigations into whether current accounts are sufficiently transparent and provide value for customers - as well as examining if unauthorised overdraft charges and fees for returned items are fair. The moves, which will include a legal test case at the High Court in January 2008, came after tens of thousands of complaints were received by the county courts and the Financial Ombudsman Service. This is a reason why providers are keen to revamp their products, suggests Lisa Taylor, a spokesperson at Moneyfacts. They believe that showing a desire to change will help their cause. Ironically, complex changes are taking place at the same time as there are demands for greater transparency. "With the OFT's investigation into banking charges still rumbling on, the recent spate of changes could be a sign that the banks are trying to pre-empt their intervention," explains Taylor. "Overall, the recent changes across the market will only cause additional confusion in a market that is already hard to compare." While some fees have seen reductions, many of the other fee changes are less clear-cut. "Fees have changed names, now have tiered levels and have moved from monthly to daily, while interest rates have even changed to daily fees," adds Taylor. "For some customers, this may be a welcome change. But many others, such as those who regularly work outside of their agreed terms, will see much higher fees." What are these changes? First Direct is no longer paying interest on current account balances (as of this month), but is offering better deals on savings and overdrafts. Its two current accounts - cheque account and bank account, which offer 0.10% and 2.00% AER, respectively - are being merged into the 1st Account, which won't pay any interest at all. Instead, a new instant access savings account, called Everyday e-Saver, is being launched, which will pay 5.5% AER, as well as a new Regular Savings account paying 8.00% AER, which is fixed for a year. In addition, the first £250 of overdraft will be interest-free, while text message banking - where alerts are sent out when a customer is close to their agreed limit - will be free for all customers. It currently costs £30 a year. Chris Pilling, First Direct's chief executive, claims that 96% of customers said credit interest wasn't an important factor in how they chose their account. "We figured it made far more sense to use every single penny we currently pay in credit interest to give customers the chance to earn serious interest on savings accounts." Alliance & Leicester, meanwhile, is abolishing interest charges on authorised overdrafts on their accounts and replacing them with a levy of 50p a day, capped at a maximum of £5 a month. There isn't any fee for arranging the facility and it will only apply when the overdraft is used. However, a £5-a-day fee will apply for those going into the red without authorisation. "Broadly positive" Mike Naylor, personal finance expert at price comparison website uSwitch.com, describes the changes as "broadly positive", but warned of the "sting in the tail" for those exceeding the limits. "Customers who slip into unauthorised overdrafts regularly will need to keep a close eye on how much it is costing them," he says. "A charge of £5 a day may seem a better deal [than the previous combination of interest and fees], but it's not capped, meaning they could face a monthly charge of up to £155." Lloyds TSB has been the first to announce reduced charges with the returned item fee - payable when the bank rejects a cheque, for example - being cut from £35 to £20. While praising the move, industry observers suggest it could be a cynical attempt to pre-empt the OFT's actions and enjoy some positive publicity at the same time. However, there has been a less enthusiastic reaction to the introduction of a tiered structure of overdraft charges. "The charges indicate that serial and excessive abusers of overdraft agreements could be severely punished, with an excess of over £100 for a full month costing a whopping £215 in fees," points out Lisa Taylor. "For those customers who make infrequent or small excesses, the charges seem much fairer at a flat monthly fee of £15 plus £6 a day for excesses of less than £25." Separately, the bank's decision to offer its highest-ever interest rate of 6.4% on its Plus range of products - for those who signed up by 9 October this year - was enough to trigger a spat with Alliance & Leicester. In a statement released by A&L, its head of current accounts, Andy Bayes, accused its rivals of re-pricing their products to try and keep pace. "It is interesting to see that Lloyds TSB is not committing to offer this product in the longer term, so after this promotional period ends it will probably be a case of 'poor rates as usual'," Bayes said. So where does that leave us? Anyone who has had the same bank account for a while should examine whether it still meets their needs, says David Black, principal consultant of banking at Defaqto."Now that it's easier to switch current accounts, it's worth reviewing your account to ensure you're getting the best deal." Research by MoneyExpert.com indicates that people are getting the message. The website's switching index shows that more than 3.6 million people have moved current account provider in the past year - that's 300,000 every month.
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