The customer costs of current accounts vary substantially depending on the provider and the type of account says a new report, but there is no evidence that low income customers disproportionately bear the burden, as has previously been claimed.

How Much Does ‘Free Banking’ Cost? An assessment of the costs of using UK personal current accounts by Dr John K. Ashton and Professor Robert Hudson, which was funded by Friends Provident Foundation, used 17 years of data to determine the total costs to customers of current account use, and whether any cross-subsidy exists between customers with different levels of income.

The cost to customers of using current account services was found to vary significantly, with a wide range between the highest and lowest cost accounts. Costs varied not only between providers, but between different types of account. In addition, the report showed that the costs of current account use have risen over time and recent increases have fallen most heavily on overdraft users.

Dr John K Ashton, a reader in banking at Bangor University and one of the authors of the report, said: “The pricing methods of personal current accounts have frequently been criticised in recent years and so we wanted to explore the customer costs of using current accounts and the evidence for a distributional cross-subsidy between low income customers and other customers.

“Our work demonstrated that while the costs of current accounts vary widely, there is no evidence of cross-subsidies to the detriment of people on lower incomes.”

High street banks were the most expensive providers overall, although their current accounts offered more payment services and were accessible through more distribution channels. Building and friendly societies were the least expensive. Fee-charging packaged current accounts and so called ‘free banking’ current accounts were shown to be the most expensive types of personal current account.

For the first time in this country, the study calculated current account costs using both visible costs, such as fees and charges, and hidden costs, such as the financial impact on customers caused by their deposits attracting little or no interest and overdrafts being charged at rates higher than the banks charge on their other loan products.

Whether there is a cross-subsidy between customers of different incomes was found to be a function of how costs are estimated. When only the overdraft and package fees of current accounts were emphasised, there was evidence of cross-subsidy from lower income customers to other customers. However, when the ‘cost’ of poor levels of interest provided on current account deposits was emphasised, no such cross-subsidy was present, as these types of costs were incurred disproportionately by higher income groups.

If a cross-subsidy exists at all, it appears to flow from both low income customers incurring large and long duration overdraft loans and inattentive customers of all incomes accumulating large current account deposits and using overdrafts occasionally, to all other customers.

The study recommends measures to make the personal current account market more affordable and transparent, including simplifying and standardising the costs of current accounts, making customers more aware that overdrafts are a high cost form of borrowing, and providing more information on the supposed benefits of additional services provided within packaged accounts.

The report also calls for a reduction in the number of accounts offered, to improve customer decision making, ‘sweeping’ facilities to automatically transfer excess funds to deposit accounts, and more joined-up regulation of the current account market.

Andrew Thompson, Grants Manager at Friends Provident Foundation, said: “It is good news that when the hidden costs of current account use are included there is no evidence of low income customers subsidising other customers. However, as the report recommends, more needs to be done to make the costs for personal current accounts clear and easily understandable, so that everyone can make sensible, cost-conscious decisions about which current account is right for them.”

The report can be downloaded from the Friends Provident Foundation website: http://www.friendsprovidentfoundation.org/how-much-does-free-banking-cost-an-assessment-of-the-costs-of-using-uk-personal-current-accounts