Laura Starkey looks at the less than astonishing findings of the OFT's new UK current account market study.
This article has already been emailed to Fools as part of our Summer Lolly campaign.
When I turned on the news yesterday morning, I had one of those "no shock, Sherlock!" moments -- and I imagine many other Fools did, too. According to a new report from the Office of Fair Trading (OFT), the UK's current account market is "not serving customers well", thanks to the prevalence of poor credit interest rates, outrageous overdraft charges and the opaqueness of companies' terms and conditions. Well I never!
Sarcasm aside, in today's Summer Lolly I'll outline the OFT's key findings -- and suggest how you could get more from your current account.
What's all the fuss about? Banks seem to be competing.
To the naked eye, it certainly looks that way. Banks base expensive ad campaigns around encouraging us to move our business -- and one even pens jolly ditties telling us about its `extra' interest rates.
Since the credit crunch, banks have sought to attract more customer deposits -- so some, such as Alliance & Leicester, Abbey and Lloyds TSB, have offered customers great rates of credit interest.
According to the OFT, though, the system's still not good enough. Its report, Personal Current Accounts In The UK, states that a whopping 88% of current accounts in 2006 received an annual interest rate of less than 0.5%.
Meanwhile, banks made around £8.3bn from their current account customers -- more revenue than they earned from savings accounts and credit cards combined.
The report suggests that the current account market features two types of competitor: `established banks' (such as RBS, HSBC, Barclays and Lloyds TSB) and `challengers' like Abbey and Alliance & Leicester. (Abbey's owner, Santander, is probably going to buy Alliance & Leicester in the next few weeks.)
While both camps try to compete on grounds of quality, challengers are more likely to compete on credit interest and fees, too.
Yet despite their efforts, established banks still have a 65% share of the current account market.
So why aren't people switching?
There's a variety of reasons why people have stuck with bum-deal bank accounts.
Firstly, as the OFT points out, banks don't give clear enough information about their charges, interest rates and rules. This makes it difficult to compare accounts comprehensively, and could put people off switching.
But perhaps more importantly, people in the UK don't trust their bank to manage a current account switch effectively.
Only 6% of those surveyed by the OFT had moved their account within the past 12 months -- and 45% of people who hadn't said it was because they were `not very' or `not at all' confident the process would go smoothly.
Despite the fact that far fewer than 45% of customers actually experience problems changing current accounts, bank switches have made a bad impression on us Brits.
The result is nicely summed up by research from both Smile and Age Concern -- whose separate studies show people are more likely to divorce their partner than ditch their bank!
Should my money and I stay put?
In my opinion, that depends on how happy you are with your bank.
Is the customer service spiffing? Does it pay you a premium, or pathetic, rate of credit interest? If you're often in the red, is your overdraft reasonably priced or extortionately expensive?
I think that unless you can honestly give positive answers to all these questions, you've little to lose and a lot to gain by switching your current account.
In the absence of any objective system for measuring the quality of banks' customer service, in my opinion the only `scientific' way to search the market is to look for a bank account that pays a good rate of credit interest.
This is especially worth considering at the moment, when many of us are feeling the pinch.
If you move from a bank that's currently paying a poor rate of interest to a market-leading equivalent, you could earn hundreds of pounds in extra interest this year.
Bag a better bank account!
Below, I've rounded up three market-leading bank accounts -- all of which will pay you truckloads more interest on credit balances than the majority of current accounts available.
Bank | Current Account | Credit Interest Rate (AER) | Funding Requirement (Monthly) |
|---|---|---|---|
Alliance & Leicester | 8.5% | £500 | |
Abbey | Current Account | 8% | £1,000 |
Lloyds TSB | Classic Plus Current Account | 6% | £1,000 |
As you can see, Alliance & Leicester's Premier Direct Current Account is still the most generous on the market, offering a whopping 8.5% credit interest.
It also trumps the other two in terms of the amount customers are required to pay into the account each month -- the lower minimum means the account is accessible to more people.
However, all three of these accounts place an upper limit of £2,500 on balances -- so be aware that if you hold more than this in your account, the interest rate you earn on that `extra' portion will be tiny.
Also, it's worth noting that all these great rates are variable -- so there's no guarantee you'll earn this level of interest for the life of the account.
Overall, although I think the OFT's findings are unsurprising, I do hope its report has an impact on how banks do business.
In the meantime, the best thing we can do as customers is refuse to accept shoddy service and paltry rates of interest.
The more people that switch, the clearer this message to Britain's bad-guy banks will be!