Abbey to end free banking: Charges on the way by end of year

ABBEY NATIONAL has confirmed that it will be levying charges on its current account by the end of the year, writes Vivien Goldsmith.

It will introduce a regular fee - probably monthly - unless a minimum balance of, say, pounds 50 is kept in the account.

It has rejected the idea of charging for each transaction, although this was advocated by a study published by Loughborough University Banking Centre in May.

'We conducted our own research,' an Abbey spokesman said. It concluded that the 'Disneyworld' alternative of charging a set fee and allowing customers to use as many direct debits, standing orders and other services as they like was more acceptable.

The report also advocated a choice of tariffs such as those introduced by Cellnet and Vodaphone, which would allow customers to choose an account structure that suits their way of using a bank account.

It is likely that Abbey will also offer customers an account with a fixed monthly fee that would have extras such as holiday discounts, cheaper holiday money, free travel insurance and discount shopping.

Abbey said that it had not yet decided on the level of any charges. It wanted to levy a charge that would be acceptable rather than drive customers away.

'We want to offer customers a choice, and a way of avoiding charges,' the spokesman added.

Customers may find that once one bank introduces charges for accounts in credit the others will quickly follow.

The banks regret introducing free banking, which was possible when interest rates were high and the cost could be hidden in the lower interest rates paid on deposits.

But now interest rates are low the banks have been unable to reduce interest paid on current accounts in line.

Abbey National, Midland Orchard and Barclays pay a flat rate of 0.5 per cent gross. Lloyds Classic account pays between 0.2 and 1 per cent and AIB between 0.25 and 0.5 per cent.

Save & Prosper, owned by the merchant bank Flemings, pays between 2.5 and 4.5 per cent. In April it introduced a charge of pounds 5 for those with less than pounds 1,000 in their account on the last day of the month.

This date was chosen as most people are paid within the last seven or eight days of the month.

It had 105,000 accounts and 6,000 would be worse off under the new regime, which also included raising the interest rates. Ian Lindsay, banking director, expected to lose 3,000 accounts after the charge was introduced, but 5,000 customers closed their accounts.

'We lost pounds 1m of balances out of more than pounds 600m,' he recalled. 'So basically the people with very small balances were hit.

'There were a lot of dormant accounts with pounds 20 or pounds 30 in them. Those accounts were costing a lot to run. An account with pounds 20 in it earns us about 4p a year in interest, but it costs 24p a month just to send out the statement.'

Save & Prosper's customers are not typical of high street banks. The average balance is pounds 15,000.