UK banks are paying customers to use their current accounts

07 June 2016

In a new comprehensive report, Defaqto, the independent financial product information company, examines the current account market in the United Kingdom. Against the back drop of the CMA retail banking investigation, Defaqto has looked at ways the banks have evolved their current account offerings in recent years.

The report reveals a fiercely competitive personal current account market in which banks are trying new ways to appeal to new customers to encourage them to switch from their rivals.

  • ‘Free in credit’ accounts will become ‘reward in credit’ accounts according to new State of the Nation current account report by Defaqto
  • One off cash bonuses for switching banks are fading fast, but ongoing cashback is key
  • The cost of unauthorised overdrafts has fallen by 30% over the past 4 years
  • There has been a marked decline in the number of benefits offered through packaged accounts

Rewards and their benefits

One of the major developments Defaqto has noted has been the rise of the reward account and the decline of one-off cash bonuses for switching. Despite the belief amongst industry experts that the end of free credit banking was imminent, it appears that ‘free in credit’ accounts are becoming ‘reward in credit’ accounts. In essence, this means that instead of paying a bank for the privilege of using their services, the bank will pay customers for using them, with seven of the largest banks offering ongoing cashback or reward schemes, most prominently Santander and Halifax.

In light of this phenomenon, Defaqto questions how sustainable reward accounts can be in the long term, from the banks’ perspective. 

Brian Brown, head of insight comments: “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.”

Defaqto has also examined which reward accounts offer the best value for differing customer profiles. The typical customer who stays in credit is likely to earn £50 to £100 a year from ongoing rewards, but amongst some providers like 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 times1 the amount that those low monthly outgoings.

Rewards and their pitfalls

Whilst this might sound appealing, Defaqto points out there are some significant pitfalls that customers should watch out for:

  • Monthly fees can be increased, as happened recently when Santander increased its 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 at 20% to HMRC, while Barclays Blue Rewards are taxable but do not have any tax deducted
  • 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

Unauthorised overdrafts

Unauthorised overdrafts have long been under scrutiny from the regulators and the media alike, but Defaqto’s insight shows that they 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’.

Brian Brown comments: “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.”

Added-Value accounts

Defaqto’s insight reveals that since 2012 there has been a marked decline in the number of benefits offered through packaged accounts2. In particular, the provision of mobile phone insurance has fallen, as has the proportion of accounts offering customers preferential deals on other banking products like mortgages, savings and credit cards. The one major area of growth has been preferential deals on personal loans to added value account holders.

Brian Brown comments: “Customers opening a packaged account will usually do so because the overall bundle of tangible benefits is worth more than the annual account fee.  Other benefits though might have much less customer value, or might apply in so few cases that the value is not achievable by the customer. For example, access to the airport lounge which might only be available in minor airports, or to the account holder but not their family.”

Download report

– ENDS –

Notes to editors:

1 Potential annual value of reward accounts (June 2016), based on different user scenarios

The changing benefits in added value current accounts (2012 to 2016)

About Defaqto

Defaqto is a provider of independent financial product and fund information and ratings focused on providing intelligence to support better decision-making.

At our heart is the UK’s largest retail financial product and fund database – we maintain it by collecting data from across the whole market, and using our expertise and insight to analyse this data and make it comparable.

From this, we create a range of products and services – ratings, software solutions, consultancy services, data services, and publications and events – to deliver this information in a meaningful way.

Our intelligence facilitates better financial decisions and greater effectiveness in the creation, management and distribution of financial products.  

Access further information about Defaqto at defaqto.com

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