Reviewed: The Santander 123 account that helps you pay your bills

Santander has launched its 123 account that not only pays you interest on money you have in it, but gives you money off when you pay your bills by direct debit. Is it too good to be true?

With millions struggling to pay their bills, the news that Santander is launching an account that helps you do just that could prove rather popular.

It’s the first account of its kind in the UK and is being launched to massive publicity, but with bankers hardly the toast of society right now the inevitable question is: What’s the catch?

The deal

Santander’s 123 Current Account offers 1% off water bills and council tax, 2% off electricity and gas bills and 3% off phone, broadband and TV bills when you pay with direct debit. This is paid as cashback, rather than as a discount on the bill itself, on a monthly basis.

It also pays you 3% interest on positive balances of more £3,000 (and lesser amounts on balances over £1,000). That’s more than all but the very best instant-access savings accounts.

“Every household in Britain has to pay bills,” said Rami Aboukhair, Santander director of products. The 123 Current Account will reward households when they are paying these bills, and reward them when they aren’t with great in-credit interest rates.”

If you head to Santander they have an online calculator for the 123 account that lets you calculate your potential savings.

The catch

The first issue is the £2 monthly fee. That means you need to get £24 a year in interest and cashback before the account pays for itself.

Then you need to ensure you pay £500 a month into the account to qualify for the benefits (although that doesn’t rise for joint account customers, so becomes £250 a month each), you also need to set up at least two direct debits from the account and only those over 18 who are also UK residents qualify for the deal.

And, of course, unless you pay your bills by direct debit you won’t get any benefit at all.

Then there’s the overdraft to consider.

Santander doesn’t charge interest on its overdrafts – instead it charges a flat rate of £1 a day (capped at £20 a month). If you go over your authorised overdraft limit you’re charged £5 a day, while fees of £5 are applied if a direct debit doesn’t have enough funds (known as a paid item fee) and £10 for unpaid items (such as bounced cheques).

Total charges are capped at £95 a month, but there’s no getting round the fact this is an expensive way to borrow. If your average overdraft is around £1,340 (and within its authorised limits) that’s roughly equivalent to 17.9% APR, which is about the same as a standard credit card.

But because the fee is flat, this means that if you only go overdrawn for a day or two or borrow more the “effective” APR comes down (so and average overdraft of around £3,000 has an equivalent APR of less than 8%), but if you borrow less for longer it becomes astronomical.

Why are they doing it?

While it has more than 1,000 branches, Santander is still not considered one of the “big four” banks in the UK – which normally named as Lloyds, NatWest/RBS, Barclays and HSBC.

So for years Santander (and Alliance & Leicester before it) has been releasing stand-out or innovative accounts to try and convince people to move to them.

Traditionally it’s done this by offering cash up front and 12-month deals, such as a 0% overdraft or 5% credit interest for a year, the new 123 Account has seen a move away from this (much copied) tactic.

“The new account will bring an end to offers that made Santander stand out – such as the £100 switching incentive. The new account will also see the death of the high introductory 5% interest rate on current account balances,” said Michael Ossei, personal finance expert at uSwitch.com.

At one point you could make hundreds of pounds by switching between current accounts from different providers, but lately there’s been a move to offer people longer-term value instead.

So is it worth it then?

Comparison site uSwitch.com calculates that the average Britons could save £72 a year by using this account. Knock off the £24 annual fee and that leaves you £48 better off – provided you stay in credit.

That’s not bad, but considering you can get £60 a year from Halifax, the Santander account is not best in class unless you have particularly large bills or are carrying a very large in-credit balance.

It’s also potentially bad value for people who occasionally slip into their overdraft for a few days. In this case the First Direct account that offers a £250 interest-free overdraft (and £100 for switching to them) is a better bet.

But the Santander account does offer some major advantages.

It’s also open to both new and existing Santander customers and you don’t need to have any other Santander products to qualify, something that’s becoming increasingly rare among top-rated accounts.

And at £500 a month, the amount you need to pay in to open one is lower than many of its competitors (you need to pay £1,500 into the First Direct account and £1,000 a month into the Halifax Reward account). That means many more people will be able to apply.

For those with big bills or lower income (and who mostly say in credit) this account could be a great way to save money. But make sure you do your homework first, as it won’t be right for everyone.

[Related link: More information on the Santander 123 Current Account]