Charges removed for basic account holders

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The deal between the Treasury and nine major banks and building societies should help the estimated nine million basic bank account holders in the UK, and the more than one million people who have no bank account at all.

Under the new agreement, customers will also have the same access to their money as standard account holders - such as not being limited to particular branches to make payments and deposits.

The new accounts will be operational by the end of 2015 - ahead of the EU Payment Accounts Directive, under which everyone must have access to a basic payment account from 2016.

Why are bank accounts so important?

StepChange Debt Charity say not having a bank account is a significant contributing factor to the "poverty premium", which sees the poor paying up to 10% more for basic services.

For example, most utility providers offer discounts to those customers who can pay their bills by direct debit or online - or charge fees for payment by other methods.

And with the move to "digital by default" benefits, simple, easy-to-access banking for all is all the more important.

For those on housing benefit, it hasn't previously mattered if they don't have a bank account, as the money goes directly to their landlord.

However, Universal Credit combines housing benefit with five other payments. These are paid in one monthly lump sum - directly into an account belonging to the claimant instead.

The existing options for people without bank accounts, like prepaid cards (explained here) and managed accounts (here), usually charge for the services they offer - and it took until August 2014 for one of the biggest managed account providers to introduce a direct debit facility.

And while credit unions are far cheaper and much more customer-focused, many only offer savings and loans rather than the full range of banking services.

But basic bank accounts, while they vary, have always been required to offer the services they do free of charge. It's only when a customer doesn't have the money in their account that they're charged, as we explain below.

The basics

A basic bank account gives customers a place to store their money, make payments from, and have money paid into.

Some, but not all, come with some form of debit card. In addition, there's no overdraft facility, and the accounts don't offer interest when customers are in credit.

Our guide to basic bank accounts as they stand is here.

They're basically free to operate, but at present banks charge account holders when they go overdrawn or try to make payments they can't cover, with fees ranging from £8 to £35.

Despite Faster Payments and the like, it's still the case that scheduled payments often come out of an account early morning, while incoming payments may not arrive until much later in the day.

That leaves a window of up to several hours when other payments may well fail because there isn't enough money in the account at that moment - and the possibility of a declined payment charge.

New standards

As mentioned, the headline change for basic accounts is the removal of those charges.

But almost as important is the issue of access - both to the wider population, and to the money customers have in their accounts.

Almost anyone, bar those with criminal convictions for fraud, can open one, even though they're meant primarily for people who can't access a standard account.

But until now, banks haven't been obliged to tell people they accounts exist.

That's meant people wanting a basic account have had to ask for one specifically when applying - otherwise their application is judged under the criteria for a standard account, found wanting, and rejected - a decision that could further weaken the applicant's credit rating.

Under the Treasury agreement, basic accounts must now be as visible to potential customers as standard and packaged accounts are.

Meanwhile those who already have them have often faced issues getting their money.

In the past few years, several banks have attempted to restrict access for their basic account holders, mostly by limiting the ATMS they can use.

But the changes mean customers will now be able to use any branch of their bank, or the Post Office, and make withdrawals from any cash machine that's part of the Link network.

Payment cards will also be mandatory - meaning an end to the cash card-only provision from some banks.

This won't be cheap - the Government says banks already spend £300 million providing basic accounts, and as StepChange's Mike O'Connor says:

"The simple fact is that providing basic bank accounts is not as profitable as providing accounts to the more well off."

Upgrading

This may be why the agreement includes a couple of provisos regarding upgrading and closing basic accounts.

Banks will have the option of upgrading customers to standard accounts under certain circumstances.

They need to take into account the customer's financial situation, the pattern of use on the account, and the continuing eligibility of the customer for a basic account.

That could give banks the opportunity to shift people who aren't in desperate need of a basic account onto a more profitable standard product.

But they will have to give customers at least two months written notice before they can do so, and explain why they intend to make the change.

Banks can also close basic accounts - if there's been no payment activity from the account for at least two years, if the customer persistently breaks the bank's terms and conditions, or if they've opened another account from which they can make payments.

Again, the customer can expect to be given at least two months notice, in writing.