First Direct, who's next? Beware current account charges

	Rate (AER)	Minimum Balance
A & L	8.50%	£1
Barclays	3.00%	£1
Barclays	3.00%	£1
A & L	1.00%	£1
Citibank	0.10%	£1
* Based on £500 Credit and is a limited guide to the market

The decision by First Direct, the online and telephone bank, to charge customers a monthly fee if they don't have a certain amount of money in their account each month, or use other services, has provoked a barrage of fury and indignation.

The move was a brave step by First Direct, which has a reputation for excellent customer service. The outrage was occasioned not just by First Direct customers themselves, but others who fear that First Direct could be a stalking horse for the rest of the banking industry - which, despite mumbling about commitments to free banking, is actually dying to go back to the good old days of charging for cheque accounts.

When Williams & Glyn's Bank (now part of Royal Bank of Scotland) became the first British clearing bank to offer free banking for personal customer accounts in credit, inflation was approaching 17% and the bank rate was around 12%. So it wasn't hard to make a profit by offering "free banking" while not paying interest on deposits. But that was then and this is now.

While one may have some sympathy for people being faced for the first time with a charge for running a current account, customers need to wake up to the fact that current account banking is not free, even when it is managed electronically - the regulatory compliance bill alone is an eye-watering burden. So-called free banking is simply subsidised by other areas of the business.

However, there are moves to curb the clearers' other money-making activities. Penal rates for breaking the terms of your credit card agreement have already been stamped on, and the Office of Fair Trading now has unauthorised overdraft charges in its sights. Think of the banks' search for profits as a hot water bottle. Squeeze the bottle at one end, and it starts to bulge at the other. Little wonder then that, earlier this year, Dyfrig John, chief executive of First Direct's parent company, HSBC, said that a move towards annual fees was "inevitable".

The situation is not all doom and gloom, however. Lets see what actually is being threatened.

First Direct is proposing to impose a monthly charge from February 2007 on customers who do not deposit at least £1,500 a month or maintain a current account balance of £1,500 a month, or take out another financial product with First Direct. So far so clear. The UK's first "virtual bank" has 1.3 million current account customers, but it reckons that the new charges will apply to 15% of its accounts, or around 195,000 customers.

No doubt many of these customers will up sticks and move to another bank, as not many with a low balance will want to foot at £120 annual bill - but don't expect many tears from First Direct.

15 July 2008 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.