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The death of free banking has been much talked about in recent years. In an environment where banks constantly chase profits in order to please shareholders it seems almost mad that some of their most popular products – current accounts – are still, on the face of it, free.
In reality, current accounts are far from free. We pay for them through extortionate overdraft fees and charges, and pitiful interest rates if you stay in the black. But, the difference between these stealth charges and an upfront fee are important psychologically. A recent survey by PwC found that half of us would switch providers if our bank tried to start charging us for our current accounts.
However, PwC argues that we should all be glad to start paying for our day-to-day banking as it would reduce the chances of the banks mis-selling us products.
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"The free current account results in some customers being served at a loss to the bank," says Steve Davies, retail banking leader at PwC. "A more sustainable approach is that customers are asked to pay a fair price in return for reasonable services, which would reduce the risk of banks seeking to recover these costs by selling other products and services that the customer may not want or need. We can trace the history of this problem through the various mis-selling scandals in the industry over the last decade."
If you are convinced by this, and are prepared to start paying for your current account there are some pretty good deals out there. Here are two packaged accounts that are worth a second look:
1. Santander 123 Current Account. For a monthly fee of £2 you get up to three per cent cashback on some of your spending and up to three per cent interest on balances. According to Moneysavingexpert.com's sums that could add up to £226 a year in profit after the fee for someone using the account to pay large bills. Average users would make around £115 a year.
2. Nationwide FlexPlus. You'll pay £10 a month for this account but in return you get worldwide family travel insurance up to the age of 75, plus smartphone insurance for everyone living at the same address as the main account holder and UK & European breakdown cover. You would struggle to get all that for less than £120 a year elsewhere. Plus you get three per cent interest on balances up to £2,500.
But it is difficult not to be sceptical about the benefits of paying for your current account. Yes, we do face a future where we are pushed into getting packaged accounts, but this will not necessarily mean banks will stop mis-selling other products. No company in the modern world with shareholders to please is ever going to sit back and think: "Yes, that's quite enough profit for us thanks." They will continue to hunt for ways to make more money.
With financial institutions this inevitably seems to lead to mis-selling scandals, and these are already brewing around some paid for current accounts. In 2013, The Guardian reported that the Financial Ombudsman Service was receiving up to 70 complaints a week about packaged accounts. Most complaints are from people saying they didn't want a paid-for account or had discovered they were ineligible for the insurance that they had been paying for.
Many people don’t pay for their current accounts, opting instead for free banking and making sure they manage their accounts in ways that mean they can get the most from them without paying any hidden charges. There are some excellent free accounts out there, for example
1. TSB Classic Plus Account. As long as you can pay in £500 a month this account pays five per cent interest on balances up to £2,000. That is better than any savings account.
2. Nationwide FlexDirect. Pay in £1,000 a month and you'll get five per cent interest on balances up to £2,500 and an interest free overdraft. But both these offers end after 12 months.
Paying for your current account isn't going to stop banks trying to part you from your cash in other ways, but there are some good packaged accounts out there. If you decide to get one then make sure you know exactly what you are paying for, and are sure you will use it. Otherwise stick to a free account and be careful to avoid the hidden charges.
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