UK banks ‘are paying customers to use their current accounts’
An investigation by independent financial research firm Defaqto revealed “a fiercely competitive” personal current account market in which banks are trying new ways to encourage people to switch from their rivals.
Defaqto noted the rise of the reward account, and the decline of one-off cash bonuses for switching.
There are now seven major banks offering a cashback or reward account including Halifax and Santander, while just four offer a cash incentive to switch, down from seven in 2015.
The study said that ‘free in credit’ accounts are fast becoming ‘reward in credit accounts’ with banks in essence paying customers for using them, rather than customers paying to bank with or use their services.
It also found that a typical customer who stays in credit is likely to earn £50 to £100 a year from ongoing rewards. However, with some providers such as Santander 123 and Natwest Reward, considerably higher benefits are available to those who have significant monthly bills. With Santander for example, those with high monthly outgoings can earn over four times the amount than those with low monthly outgoings.
While this might sound appealing, Defaqto warned there are some significant pitfalls that customers should watch out for:
- Monthly fees can be increased, as happened recently when Santander increased its 123 account fee from £2 to £5 a month.
- Some rewards are considered taxable by HMRC and some aren’t. For example, the Halifax and Co-op banks pay monthly rewards on which they pay income tax to HMRC, while Barclays Blue Rewards are taxable but do not have any tax deducted. This means taxpayers need to declare this to HMRC – though see YourMoney.com’s Personal Savings Allowance guide.
- Some of the accounts, such as Santander and TSB, pay relatively high rates of interest on particular account balances. Those using the account as both a savings pot and a transactional account need to be careful to ensure their balance stays at or above the level needed to achieve the higher savings rates.
- For some accounts the rewards on offer are heavily dependent on having other products with that provider – typically a mortgage or home insurance. Customers may well be better off overall by shopping around for those products and buying them elsewhere.
Brian Brown, head of insight at Defaqto, said: “If customers remain loyal to their bank and purchase multiple products, banks can afford to run their current accounts as loss-leaders, cross subsidised by the other product types. However, if customers solely use the current account and switch frequently, it is difficult to see how banks will be able to afford to keep offering cashback rewards in the long term.”
Brown added that unauthorised overdraft charges have become cheaper, particularly for the heavier overdraft user. For most overdraft scenarios, the average cost has fallen by around 30% since 2012 not including the effects of inflation, although they are still not ‘cheap’.
He said: “According to the Current Account Switching Service (CASS), Santander is gaining the most customers at present. This is despite Santander having the highest unauthorised overdraft costs. Conversely Barclays, which is losing the most customers, has the lowest unauthorised overdraft charges, according to our report. From this we must infer that customers switching banks at present are doing so on the strength of the benefits and rewards, rather than on the overdraft fees and charges.”