Andrew Bailey, the executive director of the Bank of England and whose signature appears on bank notes from his time as chief cashier, described free banking as a "dangerous myth" which encourages banks to increase fees for other services.
There are 120 million current and savings accounts at UK banks, the majority of which do not have a charge unless overdrawn unlike bank accounts in many other parts of the world.
Dr Bailey said this free banking makes it hard, for both customers and banks, to link costs to products and services received and that it may have spurred the mis-selling of products like payment protection insurance.
The nation's four largest banks Barclays (LSE: BARC.L - news) , Lloyds, Royal Bank of Scotland (LSE: RBS.L - news) and HSBC (LSE: HSBA.L - news) are paying a large part of around £9bn in compensation for mis-selling the loan insurance.
"In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying," he said in a speech to the Westminster Business Forum.
But regulatory intervention may be the only way forward, he added.
"It is hard for a single bank to break out of the existing situation without appearing to raise the price of its service to customers.
"And, it is hard for the industry as a whole to break out without appearing to collude. So, it may require intervention in the public interest, not least because it is a way to encourage greater competition."
The comments received a mixed reaction from consumer groups.
Mike O'Connor from Consumer Focus said: "There would be real value in establishing a more open and honest relationship between banks and their customers on what they get, how much it costs and whether others are offering better value for money.
"What mustn't happen is that consumers end up with the worst of both worlds - paying for accounts but still enduring unfair charges, opaque and complex products, mis-selling and poor customer service."
Meanwhile, Dr Bailey, who is due to become second-in-command at the Prudential Regulatory Authority when it replaces the Financial Services Authority as regulator, also suggested the UK base interest rate would remain at 0.5% for the foreseeable future and that domestic banks were prepared for Greece leaving the euro.