Free Banking Not So Free, Consumer Group Says

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The concept of free banking is a myth, according to the consumer group Which?, whose research suggests some customers are paying up to £900 a year in charges on supposedly free current accounts.

It follows a series of comments by senior industry figures who claim that banks are forced to charge excessively high transaction fees to make a profit on daily banking services that are supposed to be free of charge.

Research by Which? has revealed an array of charges for customers when their accounts go overdrawn without permission from their banks.

A customer who goes into the red for two days every month, without permission, would end up paying £120 a year in fees on their Halifax Reward Current Account based on its daily charge of £5.

The same customer could end up paying £900 a year with the Yorkshire/Clydesdale Bank Current Account Plus based on a monthly charge of £75.

Bank of Ireland (Irish: BIR.IR - news) , Citibank, Ulster Bank, First Direct, HSBC (LSE: HSBA.L - news) and Nationwide all charge more than £50 a month, which adds up to fees of at least £600 a year for those who go overdrawn at least once a month without permission.

Which? chief executive Peter Vicary-Smith said:  "When some people are paying up to £900 a year in bank charges it completely shatters the myth that banking is free.

"It’s a disgrace that the very people who bailed out the banks are being asked to pay more for the most basic accounts, while the industry continues to be rocked by scandals like PPI mis-selling, Libor rate-rigging and IT failures.

"Banks must be far more transparent about their fees and charges so that people can clearly see what they already pay."

Which? has also criticised high interest rates on authorised overdrafts which at 19.9% APR charged by RBS (LSE: RBS.L - news) /NatWest and HSBC are higher than many credit cards and personal loans.

Fees for withdrawing cash from ATMs while overseas have also come under fire.

Some 62% of customers surveyed by Which? said they had paid a bank charge that they thought was unfair, hidden or disproportionate.

Meanwhile, 94% think the banks should be more transparent about charges on their account.

The incoming chairman of Barclays (LSE: BARC.L - news) , Sir David Walker, has described recent banking scandals as "the consequence of not charging for bank accounts" and said he's in favour "in principle" of axing free current accounts.

City watchdog Lord Turner, chairman of the Financial Services Authority, has described it as a "central problem in UK retail banking".

Martin Wheatley, chief executive designate of the Financial Conduct Authority, said free banking is an "outmoded concept" and "doesn’t really work".

Most banks offer both "free" current accounts and others that offer a package of services such as travel insurance and car breakdown cover for a monthly fee.

A new system to make it easier for customers to switch between banks is due to begin next year and industry experts say it is unlikely that any single bank would stop offering "free" accounts before then.