Free account bonanza as banks drop packages
BANK customers are finally set to cash in on renewed competition in the current account market six months after the seven-day switching guarantee was introduced.
Lloyds Bank will tomorrow become the third provider this month to launch a new free current account, following on the heels of M&S Bank and TSB. Experts predict that more banks will step up their efforts to attract new customers over the coming months ahead of the entry into the market of Tesco Bank and Virgin Money.
The Lloyds move also comes a year after rules took effect forcing banks and building societies to send statements to packaged account holders making it clear exactly what they are paying for. One in five people has a packaged account, paying an average fee of £15 a month in exchange for benefits including travel and home insurance.
The packaged account statements sent to customers under the new guidelines have triggered a surge of mis-selling complaints about the product.
The number of complaints about packaged accounts from people in Scotland was seven times higher last year than in the previous 2012, Financial Ombudsman Service (FOS) figures show.
Around three-quarters of packaged account cases taken to the FOS are found in the consumer’s favour, with most complaints concerning the way the product was sold and problems with the benefits, including insurance policies for which the customer wasn’t eligible.
Some banks, Lloyds among them, took their packaged accounts off the shelves before the rules took effect last March. A year later – and following the launch in September of the seven-day switching guarantee – Lloyds joins M&S Bank and TSB in launching a new free current account.
“With the packaged account market under increasing scrutiny and frequent suggestions that it could the next mis-selling scandal, it’s no surprise that banks are focusing their efforts elsewhere,” said Andrew Hagger, of Moneycomms.co.uk. “I’m sure packaged bank accounts are well down the list of priorities when it comes to banks trying to recruit new business – profitable as this segment of the market may be, I can’t recall the last time I saw any proactive marketing for these accounts.”
Packaged accounts could slowly disappear, according to Hagger. “It may be a case that the banks decide to manage their existing packaged account back book and gradually wind down these accounts over time,” he said.
The new Club Lloyds account will be available to new and existing customers in branches, online and by phone. But customers need to pay in a minimum of £1,500 a month and have at least two monthly direct debits.
It features interest of 4 per cent AER on credit balances between £4,000 and £5,000 and reduced mortgage rates.
But the savings rates on smaller balances are lower, paying 1 per cent AER up to £1,999 and then 2 per cent AER up to £3,999.
Existing Lloyds Vantage customers currently get 1.5 per cent on credit balances up to £1,000 and then 2 per cent up to £3,000. “This account has its ‘good’ and its ‘could do better’ elements, depending on how you run your day-to-day banking,” said Hagger. “As always, make sure you understand how the different components will or won’t work for you before you sign on the dotted line.”
The first free current account from M&S Bank, which will launch in the summer, includes an automatic £500 overdraft facility, with no interest charged on the first £100. The debit card will be free of transaction charges on overseas cash withdrawal and M&S shoppers will be able to earn loyalty points on debit card spending.
However, the account won’t pay interest on credit balances. In contrast, the new account from TSB pays 5 per cent on balances up to £2,000 provided at least £500 is deposited each month.
“An increased desire to win new accounts has already prompted M&S Bank and TSB to table attractive new current account options in recent weeks and I’m confident that this latest move from Lloyds won’t be the last we see before summer’s here,” Hagger said.