Alliance & Leicester scraps overdraft interest charges

Alliance & Leicester announced today it was scrapping interest charges on overdrafts and replacing them with a daily fee for people who go into the red.

The group said it was the first UK bank to abolish overdraft interest for all its customers.

Instead of being charged overdraft interest of 5.9% or 7.9% and an overdraft arrangement fee, A&L customers who have an authorised overdraft will pay capped at £5 (€7.1)a month.

The bank said changes, which are being introduced from October 22, meant no one would ever pay more than £5 a month for an agreed overdraft, regardless of how overdrawn they were or how many days they used the facility.

Customers who stay in the black will not be charged anything to run their current account.

The group, which is the latest high street bank to change its overdraft charges, said the move had been prompted by the current High Court test case between a number of banks and the Office of Fair Trading (OFT) over unauthorised overdraft charges.

Earlier this week internet bank First Direct said it was scrapping interest payments on its current accounts and would instead be reinvesting the money to give its customers a better deal on overdrafts and savings, including reducing the rates it charged for unauthorised overdrafts.

Earlier this month Lloyds TSB announced it was reducing its unauthorised overdraft charges and cutting its penalty interest rates by up to a third to make them the same as the rates charged for authorised borrowing.

Andy Bayes, head of current accounts at A&L, said: “Alliance & Leicester is committed to offering free banking for customers who stay in credit – our research confirms that 94% of people agree that having a bank account should be free.”

But he added that the research showed that 81% of people thought that if banking was free, it was fair that customers had to pay when they went overdrawn.

The bank found that there was a lot of confusion surrounding overdraft rates, with 62% of people with an overdraft not knowing the rate they were charged, while those who thought they knew, massively underestimated it.

Kevin Mountford, head of current accounts at moneysupermarket.com, said: “We are seeing some real innovation in the current account market, and Alliance & Leicester’s new deal definitely qualifies as innovative.

“A&L’s reason d’etre here is to simplify current account fees, making them more transparent.

“With everything though, the devil is in the detail and customers should ask themselves whether the new simplified fee structure does actually save them money in the long-term.”

He said his analysis suggested A&L customers would be marginally better off, but the account was still a long way behind HSBC in terms of value for money.