Banks cry poor on the cost of cheque accounts: Maria Scott reports on the pluses and minuses of interest-paying current accounts

MANY current accounts now pay less than 1 per cent after tax, so yesterday's base rate cut leaves little room for further reductions.

Some high street banks have been considering reintroducing transaction charges on current accounts and, rather than cut interest rates to even more laughable levels, may now review the whole charging structure.

Meanwhile, customers should be scrupulous about switching surplus funds from their current accounts into savings accounts.

With returns on current accounts falling like stones, people who overdraw regularly on an interest-bearing account should check whether they would be better off with an old-fashioned account that pays no interest.

If the charges for an overdraft are higher on the interest-paying account than on the ordinary account, you may be worse off.

National Westminster, for example, charges pounds 19 a quarter for overdrafts on its ordinary current account and pounds 23 on its interest- paying Current Plus account.

'A customer who is going to go overdrawn regularly would be recommended to use a non-interest- bearing account,' a NatWest spokeswoman said.

TSB is a little more encouraging than some banks about the future of its interest rates, down to 1.5 per cent net on its mainstream current account. David Brooks, the bank's senior product manager for cheque accounts, said: 'It's time to stop taking the mickey out of our customers.'

If the base rate dropped another point TSB might have to think again but it hoped to hold the present rate, introduced at the beginning of this month, for as long as possible.

Interest-bearing current accounts have only been available on the high street for about five years. More than 30 million have now been opened and customers can be forgiven for feeling that the rates have been allowed to drift once the banks built up business on the accounts.

When Nationwide unveiled its account in May 1987 the interest rates ranged between 2 and 5 per cent net, depending on the amount in the account. The base rate at the time was 9 per cent, the same as it was before yesterday's cut. When the base rate fell last month to 9 per cent once more, Nationwide set its current account rates at between 1.13 per cent and 5.6 per cent net.

Abbey National's current account was announced in November 1987 with a rate of 4.5 per cent net of tax while the base rate was 9 per cent. The base rate dropped to 8.5 per cent by March 1988, when the account went on the market. Abbey set a rate of 1.13 per cent against last month's 9 per cent base rate.

But banks are crying poor over the cost of running current accounts, claiming they lose money on customers who habitually keep small amounts in their accounts, write a lot of cheques and have numerous direct debits and standing orders, yet earn interest.

Save & Prosper, a relative newcomer to the current account market, says it needs to see a running balance of pounds 2,500 on its current accounts to break even. Accordingly, when the company cut rates recently, it cut them by 1.5 percentage points on balances up to pounds 1,000, but less on higher balances.

Ian Lindsey, director of banking at S&P, explained: 'An account with an average balance of say pounds 500 would earn interest of pounds 45 for a bank, assuming it is invested at a money market rate of 9 per cent. Out of that pounds 45, the bank has to pay for all costs, such as debits and cheques, statements, issuing cards and fraud. The high street banks say that on average the cost of a transaction is 50p to 60p.'

Some banks have cut interest rates on their current accounts but not overdraft rates. TSB, for example, charges an annual percentage rate of 34.4 per cent for unauthorised overdrafts and 23.1 per cent for authorised ones although the bank says the overdraft rate could yet be changed.

Royal Bank of Scotland is launching a service called Balanced Banking that will automatically switch money from a current account to a savings account and vice versa.

Customers must commit a minimum of pounds 5,000 to a savings account with the bank and if their balance falls below this during a month, they will be charged pounds 5.

The Gold Cheque Account will offer a full current account service and pay interest of 2.78 per cent net of tax. Customers will be asked to stipulate the maximum and minimum balances they want to maintain in the account. Any amounts over the maximum will be automatically swept into one of two savings accounts, Gold Deposit or Gold Ninety Account.

Customers who nominate the Gold Deposit account can also have money swept out of it to top up their current account.

----------------------------------------------------------------- INTEREST-PAYING CHEQUE ACCOUNTS - % NET ----------------------------------------------------------------- Bank/BS Account pounds 1 pounds 500 pounds 1,000 pounds 5,000 Abbey National Current 1.13 1.13 1.13 1.13 HICA - - 3.34 3.83 Barclays Interest Option 0.75 0.75 0.75 0.75 Prime - - 3.75 4.13 Lloyds Classic 0.38 0.38 0.75 1.50 Gold Service 0.75 0.75 1.88 3.75 Midland Orchard 1.12 1.12 1.12 1.12 Meridian 2.22 2.22 2.22 2.95 Nationwide Flex 1.13 1.50 1.50 4.13 NatWest Current Plus 1.13 1.13 1.13 1.13 TSB Interest Cheque 1.50 1.50 1.50 1.50 (Eng, Scot, Wales) HICA . 75* 1.50* 1.50* 3.56 * Rate paid below opening balance -----------------------------------------------------------------