End of free banking becomes a reality

Increases in interest rates charged to customers using authorised overdraft facilities have narrowed down the options available to those looking to access cheap consumer credit, according to a new report* from UK-based independent market analyst Datamonitor.

‘The credit crunch has led to overdraft credit becoming more expensive, and when you consider that lenders have clamped down on credit card and unsecured lending, this has drastically diminished the average consumer's ability to borrow', comments Rod Logan, financial services analyst at Datamonitor and author of the report.

In addition, if the Office of Fair Trading (OFT) investigation into overdraft fees and charges finds them to be unfair, consumers may end up paying for current accounts as the banks look to make up for lost revenue.

Overdraft rates for standard current accounts have increased

The authorised overdraft rates for most current account providers have increased since the beginning of the credit crunch towards the end of 2007. The current economic turmoil and rising prices obligates consumers to rein in their spending.

Many consumers had been overstretching their finances during the years of plenty and now find it more difficult to service these debts.

With banks offering less favourable deals on loans and credit cards, some may have contemplated their overdraft as a source of funding, but the costs will be more expensive than expected.

The newly-tightened borrowing criteria - leading to consumers facing more expensive credit across the board - came as a shock to many after years of easy access to funds.

The OFT investigation may see a reduction in overdraft fees

In April 2008, the High Court ruled that the OFT had the right to investigate bank overdraft fees and charges. If the language presented in the terms and conditions can be considered to be unfair, the high street banks will be forced to reduce the fees and charges levied against those using their overdraft facility. This could see the end of free banking and the introduction of a monthly fee-paying model.

A charge per transaction for standard banking services could be one of the answers, as the banks will need to find other ways to reclaim the estimated £2.6 billion** they receive from overdraft fees and charges. In the current difficult market this is revenue that the banks can ill-afford to lose.

“Fee-paying current accounts may be the last thing that consumers want, but potentially - by creating significant reductions in fees and charges for overdraft usage - this would present a lifeline for those in serious financial difficulty.

The remaining question is: which bank is going to move first?” asks Logan.

Notes

*UK Currents Accounts 2008 is a report published by Datamonitor
** Source: OFT, 2006