Think your bank is ripping you off? You’re probably right. According to the Office of Fair Trading (OFT), UK banks make more than £4bn a year in interest just on the money sitting in our low-interest current accounts. That’s not far off twice as much as they make from overdraft charges.
Many current accounts receive a decent amount every month in the form of salaries yet half of them offer annual interest rates of only 0.1% and a good many offer no interest at all. Despite this, most of us never move our current accounts to providers offering better deals – according to the OFT only 6% of us have bothered in the last 12 months. Sadly, that’s one of the lowest rates in Europe. So what makes us so lethargic, particularly when we change, say, mobile-phone providers or utility companies at the drop of a hat?
The answer, says John Fingleton, chief executive of the OFT, is that because the banks make their accounts too complicated and their charging structures impossibly opaque, so it is just too hard to compare them with each other properly. Some accounts, for example, offer juicy looking interest rates which are eroded by maximum or minimum balance requirements or annual fees for special features few use (very basic car breakdown cover, for example).
Take Alliance & Leicester’s Premier Direct Account: it offers 8.19%, but you have to pay in £500 a month and you only earn the headline rate on the first £2,500. Beyond that you are back down to 0.1%. Many banks then have endless variations on overdraft charges (which can range from 0% to 20%) and hit you with other obscure transaction costs. Overall, says Fingleton, “customers lack the information to choose the best deal”, which “weakens banks’ incentives to compete”.
On the plus side, moving your current account should be pretty easy: the OFT says that 80% of people who do move say that doing so is “easy” or “fairly easy”. So if you swap, where should you take your business?
Three years ago we asked MoneyWeek readers to name their favourite bank. Almost every response said the same thing – First Direct. Last month Szu Ping Chan of Fool.co.uk asked her readers the same question. Guess what? First Direct won again. “Time and time again,” says Chan, ” First Direct has been praised for its quick, efficient service featuring people, not machines, at the end of the phone 24 hours a day – even on Christmas Day.”
Other goodies include a welcome present of £100 when you switch and put in at least £1,500 a month, a £250 interest-free overdraft (further agreed overdrafts cost 12.9%, not cheap, but far from worst), and a “handy sweep facility” which automatically moves any money left in your current account into a higher interest account at the end of the month. The price? No interest on your current account. But, as Chan says, most people regard this as a small sacrifice for efficiency and unusually high levels of customer service.