Why are current accounts free in the UK?

Last updated: 7 May 2022   By Dr Lucy Brown, Editor

The free current account is the most common type of bank account in the UK.

Major banks all offer free current accounts, although they do cost money behind the scenes to keep going.

Government rules also say big banks must offer a basic bank account that is completely fee-free to people ineligible for a current account.

However, while basic bank accounts are covered by the regulations, the normal current account is not and banks could theoretically impose charges.

banking atm use
Credit: totojang1977/Shutterstock.com

Who offers free current accounts?

All mainstream banks in the UK offer standard current accounts that don't charge monthly fees.

However, many banks also offer a paid tier of current account with extra features such as extra interest on balances, mobile phone insurance, breakdown cover and other rewards.

Most customers will opt for the free standard account, but, as we explain below, these accounts are free because the banks have decided not to charge rather than any regulations keeping them free.

There are some accounts that are guaranteed to be free: basic bank accounts.

Basic bank accounts

Under the terms of a deal struck in late 2014 by the Treasury and the nine biggest UK banks and building societies, those who can least afford to pay for their banking should now have much better access to truly free basic banking facilities.

Basic bank accounts, also known as cash accounts, give their users somewhere to have payments made in to and out of, and to keep their money in between times - and that's it.

There's no borrowing or credit of any kind - no overdraft facility and no cheque book - and until the Treasury deal, some basic accounts didn't even offer a proper payment card.

Most now come with a basic (i.e. sometimes not contactless) debit card; some still come with separate cash and payment cards, the latter of which need to be loaded with money before they can be used.

Because there's no planned overdraft facility, basic bank account providers deal with the matter of a customer potentially going into the red in a couple of different ways: some allow the transaction that will result in the account going overdrawn, others will refuse to make the payment.

Crucially, however, there's no charge whichever method they use.

There have been changes and improvements to the way basic bank accounts operate over the years, with providers like Virgin Money adding extra features that might not usually be available on a basic account.

People who have been declared bankrupt should also find it easier to get a basic bank account now, even though it was difficult in the past.

The accounts must be visible enough that anyone who might benefit from them knows they exist, and in theory almost anyone can open one.

But some providers will only suggest their basic account to those who apply for a standard account and are turned down, and all providers have the right to move basic account holders to a different type of account if their financial situation appears solid enough.

In other words, basic bank accounts are the failsafe for customers who can't get a standard bank account.

Why are bank accounts free?

The free to use current account as we know it is a fairly recent invention, dating back to 1984 and the decision of what was then Midland Bank to remove fees for customers who stayed in the black.

The rest of the UK's high street retail banks followed suit within the next few months - none wanted to be charging customers to deposit cheques or make a withdrawal when they could so easily pop down the road to open an account with a rival that let them do those things for free.

That means most everyday transactions, from withdrawing money at a cash machine to paying bills - whether by direct debit or cheque - will cost us nothing, at least in terms of fees levied by our own bank.

We've become so used to this model that the accounts that do charge a monthly fee are expected to provide extra benefits of some sort.

The cost of free banking

Some of us remember the days when we used to earn interest on our account balances without having to jump through any hoops.

Most free current accounts offer no interest whatsoever, or so little that it's barely worth thinking about - yet the banks are earning interest on money sitting in our accounts. They use at least part of those earnings to help cover their costs.

However, providing free accounts isn't free to the banks themselves. In 2010, Helen Weir - then head of Lloyds TSB's retail banking arm - told a Treasury Select Committee that free accounts cost their holders £150 a year, or £2.90 a week.

It's likely the figures are higher now, so it means that banks are losing money on every non-fee-payment account - unless customers pay in other ways.

How else we pay for free banking

Many of us have some kind of planned overdraft in place; for some it's a security blanket, while for others it's a necessary tool for getting through the month.

If we have one but don't use it, it won't cost us a penny - but if we need it, we can expect to be charged at a significant rate.

After the Financial Conduct Authority (FCA) brought in rules saying that unarranged overdrafts must cost the same as unarranged overdrafts and banning excess fees, banks responded by putting their overdraft fees up to compensate for the lack of revenue from unarranged overdrafts.

It's also the case that some accounts that reward us for being in credit withhold that reward in any month that we need to use the overdraft - as well as charging us for the privilege of going into the red.

Bank fees while travelling

Another way banks ensure their customers are not costing them too much is by charging fees for using our cards abroad.

With only a few (often quite specific) exceptions, most banks will charge us a non-sterling transaction fee on any kind of transaction we make in a foreign currency.

The typical non-sterling transaction fee tends to hover around about 3% of the value of the transaction. Some banks and building societies also charge a separate flat fee of up to £1.50 every time we use their card.

If we're withdrawing money from a foreign cash machine, there are various other potential charges to beware of: our own card issuer will often levy a fee for using a foreign provider's ATM, which can range from a minimum of a couple of pounds to up to 3% of the value of the withdrawal.

And while any local ATM fees aren't the fault of our bank, the non-sterling transaction fee on that part of our cash withdrawal will be.

Special services

Finally, there are the times when we need our bank to do something extra for us - from stopping payments made in error, to helping us with admin and vouching for our financial stability or arranging payments we can't make from our own accounts.

These cost everyone, from holders of free current accounts to private banking customers - but just how much is most shocking to those of us who have otherwise free banking.

We've a more detailed guide to some of the most common "hidden" charges levied by banks and building societies

Will banks start charging for current accounts?

HSBC brought the idea of paid current accounts back to the fore in 2020 when they said they could consider fees for basic banking services such as current accounts in some countries.

They argued they were losing money on a large number of UK current accounts following a 35% fall in quarterly profits, although the idea has not yet been taken any further.

As we've discussed, free banking in the UK is a competitive decision based on decades of in-branch banking services, but that situation has now altered, and banks are losing customers to mobile only rivals just as easily as they would if there were several bank branches on the same street touting for the same business.

When asked, banks usually say they have no plans to introduce current account fees, yet it would likely only take one big name to change their mind for us to see multiple banks switch to fee-paying models.

In that scenario, competition on current accounts would become a major issue for customers and we would likely see customers evaluating accounts based on:

  • The level of the monthly fee
  • Low overdraft rates and access to other credit products
  • Extra services on offer with the account such as insurance, breakdown cover or in-app access to a credit score
  • The customer service offered by the bank
  • Quality of the app and other services on offer

Fee-paying current accounts could become more competitive, with banks doing more to attract customers and leading to more people shopping around for current accounts with different features before using the Current Account Switch Service (CASS) to change from one bank to another.

That said, a shift away from free bank accounts might cause a public outcry, so it remains to be seen whether any bank will take that step over the next few years.

We have also seen digital bank Monzo start charging customers who use their account as a secondary account for extra services in a sign that customers holding multiple accounts across several financial providers is hurting the banks' bottom line too.

Summary: Free for now

Free banking in the UK is still the norm for now, and it's unlikely we'll see a seismic shift anytime soon.

One of the key reasons why banks were considering the move in 2020 were the worries about the Bank of England (BoE) setting a negative base rate that would have essentially charged banks for holding cash. In those circumstances, it would be understandable for banks to want to cover their losses.

However, with the base rate rising to 1% in May 2022, banks will not be losing extra money for the foreseeable future and perhaps that removes the immediate threat of ending fee-free banking for all.

That doesn't mean banks won't continue to push their other products, encouraging customers to take out credit cards or loans with them, and suggesting they may want to upgrade to their fee-paying accounts.

Remember, some of the features on these accounts can be worthwhile and it's worth checking to see if they can actually benefit you before dismissing them.

For most people, though, fee-free banking remains the way to go for now.


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