Bank charges

The term bank charge covers all charges and fees made by a bank to their customers. In common parlance, the term often relates to charges in respect of personal current accounts or checking account. These charges may take many forms, including:

Much of the following discussion relates to the UK personal current account market.

Banks may charge their customers a fixed monthly charge for the provision of the account. In the UK, this was not common practice until the 1990s when banks began to introduce this type of bank charges as a means of product differentiation - often offering additional services bundled with the bank account itself (e.g. travel insurance, mobile phone insurance, preferential rates on other products).

Until the 1980s, most banks in the UK charged for all transactions. A number of newer entrants to the personal current account market took a "no fees whilst in credit" approach, leading very rapidly to a situation where no bank could compete with others without offering the same deal.

While the loss of income incurred was, to some extent, covered by the interest earned on carrying balances in current accounts, the banks' profitability on personal current accounts was severely impacted by this change in the charging structure. In turn this led to the banks' increased use of charges for exceeding overdraft limits as a means of generating their required level of profitability.

Most banks charge interest to their customers in respect of overdrafts. It is common to charge differentially for authorised and unauthorised overdrafts, with unauthorised overdrafts often bearing an interest rate two or three times higher than authorised ones.

In order to gain customers from competitors, banks will sometimes offer introductory 0% or low interest rates on authorised overdrafts, together with generous initial overdraft limits.

As part of the development of the personal current account market in the UK, certain banks have altered their overdraft charging structure to a fixed daily charge, irrespective of the size of the overdrawn balance.

As banks' income from transaction charges declined, due to the "free banking" that had become the de facto standard in the UK personal current account market and the banks' income from carrying balances fell due to declining interest rates, banks sought to increase the profitability of their businesses by significantly increasing the charges levied for exceeding authorised overdraft limits, or when customers make payments (or attempt to make payments), including direct debits, cheque payments or standing orders, where no authorised overdraft limit exists. Typically banks charged in the region of £25 to £39 for transactions in breach of an authorised overdraft limit, irrespective of the size of the transaction or the degree by which the limit was exceeded.

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