Does free banking still exist?

Updated on 22 August 2012 | 15 Comments

Free banking is a myth, according to Which? as hidden charges mean we're still paying for the service. So what's the answer and are packaged accounts the way forward?

Current accounts are often advertised as being ‘free’ however, research from Which? says this is a total myth because customers are actually shelling out almost £900 in hidden bank charges.

Although the banks may be selling these accounts as having no costs or charges, customers are still forking out for many things including going overdrawn and using the card abroad.

Hefty overdraft fees

When you sign up to a bank account you’ll be allotted a certain amount of money in your overdraft, which should only really be used for emergencies.

However, the banks are charging excessive fees for customers who dip into this money and many banks, including RBS/Natwest and HSBC, charge an annual percentage rate (APR) of 19.9% for money in an authorised overdraft which is more than many credit cards and personal loans.

Going over the authorised overdraft into an emergency reserve will push the fees up higher and charges for being overdrawn for two days per month without prior permission range between £120 and £900.

Low interest rates

Those customers who maintain a balance of credit in their current accounts are also losing out. This is because the interest rates available in a current account are generally poor and far lower than if you were to use a savings account instead.

Customers with an average balance of £1,500 are set to lose around £63 a year, with Natwest Select and Lloyds TSB Classic accounts, for example. This is because they are missing out on £48 in interest every year by keeping their cash in these low-paying accounts as opposed to putting it into a market-leading instant-access savings account.

On top of dismal interest rates, there are also massive fees for using the card overseas.  Those customers will also be stung with a £15 charge when making two £100 cash withdrawals and two £50 debit card payments while abroad.

Poor transparency

When customers were asked how they felt about these hidden charges, 62% thought they had paid a bank charge which was unfair, hidden or disproportionate and 94% thought banks need to be more transparent with these fees.

The research from Which? comes after comments from several of the banks suggesting an introduction of higher charges for current accounts as a solution to future scandals. However, Which? says this would breach Competition Law and should not go forward.

The solution

Although free current accounts are less popular today, there should be a way for all banks to provide electronic information for customers so they know exactly what charges are involved. This would help customers compare different bank accounts and would increase competition in the market.

Portable account numbers would also aid with switching bank accounts and a rise in competition on the high street would give customers the power to vote with their feet forcing the banks to compete for customers and offer better deals at lower prices.

Our comparison tables will give you an idea of the best free accounts and here I’ve picked out five of the best.

Top five free bank accounts



Overdraft rate

Overdraft features


First Direct 1st Account


£250 interest-free buffer

£100 when you switch banks. Must deposit at least £1,500 each month.

Halifax Reward Current Account


£1 a day up to £2,500, £2 a day over £2,500. £5 a day if you go into unplanned overdraft.

Get a £5 reward each month when you deposit £1,000.

Barclays Bank Account

19.3% plus £22 per charging period usage fee

Up to £5,000 available, first £200 is interest free.


Santander Everyday Current Account


£1 per day usage fee over the agreed interest-free buffer.

No daily arranged overdraft fee for the first four months.

Nationwide BS FlexAccount


Interest-free buffer

Includes free European travel insurance, discounted personal loans and special mortgage deals.

 Packaged accounts

On the other end of the scale are ‘packaged accounts’ which are offered by nearly all the banks. These are accounts which include a selection of benefits, such as travel and mobile phone insurance, in return for a monthly fee of around £15.

Our comparison tables will give you an idea of the best packaged accounts on the market and here I’ve picked out five of the best.

Top five packaged accounts


Overdraft rate

Overdraft features



Santander 123 Current Account

£1 per day usage fee (capped at 20 days in each month).

Interest-free buffer can be arranged, up to £1,200 available.

No daily arranged overdraft fee for the first four months. Cashback available on your purchases and interest on your cash.

£2 a month

The Co-Operative Privilege Account


£200 interest-free buffer

Worldwide family travel insurance, mobile phone insurance, 20% off first year’s home insurance (with the Co-Op).


Natwest/RBS Select Silver Account


£100 interest-free buffer

European travel insurance, mobile phone insurance, five music downloads from hmvdigital, three LoveFilm rentals.


Natwest Advantage Gold


Overdraft limit is subject to eligibility.

Mobile phone insurance, Green flag car breakdown, annual worldwide travel insurance, identity theft protection.


Halifax ultimate reward account

£1 a day between £300 and £2,500m £3 a day over £2,500.

£300 interest-free buffer.

Worldwide multi-trip family insurance, mobile phone insurance, AA breakdown cover.

£10 (must pay in £1,000 a month)


What do you think about the myth of free banking? Is it inevitable or are there ways around it and are you happy to pay for a current account? Leave your comments and suggestions in the box below.


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