by Simon Wright

Created on: May 20, 2008

Free banking has long been a fundamental element of UK current accounts, in comparison with the US where checking account customers are usually required to pay a monthly or yearly subscription fee.

However, the term 'free banking' may mean different things to different people, so it's worth starting by defining what free banking is and what it isn't.

Put simply, free banking means that if you keep your balance in credit (i.e. above 0) then you will not incur any charges. Most UK banks offer at least one free banking current account, so all UK bank customers should have the option of benefiting from free banking.

Free banking, however, does not mean that the bank will never apply any charges to your account. If you exceed your agreed overdraft limit, then the bank will apply an unauthorised borrowing charge and may also apply paid referral or unpaid item charges where a transaction has either been allowed to go through or has had to be declined whilst you've been in an unauthorised overdraft position.

In my view, this is a fair enough arrangement. If I am sensible and maintain my account correctly, then I get the account for free. If, however, I abuse my account, then I know that I will incur charges. The controversy over charges, in my opinion, is more about the level of charges applied rather than the right of banks to charge them.

It's worth also pointing out that the dominance of free banking in the UK is under threat. We've seen a growth in the sale of packaged accounts rather than free banking accounts. Packaged accounts offer a range of additional benefits (such as discounts on insurance, concert tickets, etc) and in return you pay a monthly subscription charge. This is more in line with the US model and is becoming increasingly prevalent in the UK. There have been some suggestions that the UK banking industry may ditch free banking and move to the US model, meaning that all UK current account customers would be required to pay some sort of regular subscription fee.

My view, though, is that customer choice is all important and I would like to think that UK banking customers will continue to have a choice between the standard free banking accounts and the more fancy packaged or subscription-based accounts. Free banking is something that we in the UK should appreciate (in the same way as we should appreciate free health care via the NHS) and still has a place in the 21st century banking landscape.

Finally, just because an account is a free banking account doesn't mean that it's automatically a brilliant account. You might get one free banking account offering 2% creditor interest, whereas another free banking account offers no creditor interest. Free banking, therefore, is just one element that you will need to look at when choosing a bank account. And, depending on your circumstances, you might find that a packaged account works better for your individual circumstances. As with all things, it pays to shop around and make an informed choice.

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