Halifax opens bank account price war

Halifax, Britain's largest mortgage lender, yesterday provoked a price war among high street banks by launching a current account that will offer an interest rate 40 times higher than most products currently available.

Halifax, Britain's largest mortgage lender, yesterday provoked a price war among high street banks by launching a current account that will offer an interest rate 40 times higher than most products currently available.

Halifax said it will spend up to £50m subsidising the offer to pay customers 4 per cent on current accounts. Most high street banks pay interest on similar accounts at only 0.1 per cent.

Lloyds TSB, Barclays, HSBC and NatWest, the four major banks dominating the current account market, will now be under pressure to follow suit.

Lloyds and Barclays said last night they were reviewing their rates, which stand at just 0.1 per cent. A spokeswoman for Lloyds said: "We are not going to respond in a knee-jerk way but we are keeping a close eye on our interest rates and we want to remain competitive."

Halifax said customers who wanted to use branches had been overlooked in the industry-wide frenzy to provide online banking. James Crosby, Halifax's chief executive, yesterday pledged to "bring some value back into high street traditional banking, where we believe three-quarters of customers still want to do their banking".

The mortgage bank also said it would charge only 10 per cent interest on authorised overdrafts, compared to typical high street rates of about 18 per cent. There will also be a facility to be £100 overdrawn without paying any fee.

The new Halifax current account will be available from early January to anyone who pays £1,000 into their account each month, even if the balance then falls below this level. Access to the account will also be available by telephone and over the internet.

At the moment, the four biggest retail banks control 80 per cent of the UK's 38 million current accounts. Halifax said it hoped the move would double its share of the current account market to 12 per cent in the next few years.

Rival banks are likely to fight back. Abbey National, another mortgage bank wishing to double its current account customer base, is believed to be about to launch a series of more competitive accounts. The bank currently offers a tiered interest rate on its current account, starting at 0.2 per cent for balances up to £5,000.

Analysts said the move by Halifax echoes a similar offensive in the mortgage market in the 1980s and 1990s. New entrants drove down the price of mortgages so that traditional lenders, including Halifax, also had to lower their prices.

Banking shares, including those of Halifax, yesterday fell on the anticipation of a price war across the sector.

It would be very expensive for the larger banks to match Halifax's offer. Analysts have estimated that the four major current account banks would have to pay up to £2.7bn a year, representing 16 per cent of pre-tax profit, to offer 4 per cent interest payments to existing and new customers.

The Halifax high street initiative comes despite its own recently launched branchlessbank, Intelligent Finance, which started its telephone service earlier this month.