UK consumers are used to current accounts with no monthly charge. That is a pricing choice, not an absence of cost, and understanding where banks earn money explains why charges show up in some places and not others.
The main revenue sources
Net interest income. The largest source for most high-street banks is the gap between what they pay on deposits and what they earn by lending or placing funds. Balances sitting in a current account, often paying little or no interest, are a cheap source of funding. This is the main reason accounts can be “free”: the customer’s balance is the product.
Lending charges. Overdrafts, credit cards and personal loans are priced above the cost of funds. Arranged overdrafts have often been priced at close to 40% a year, though rates vary by provider, which is why the Financial Conduct Authority (FCA) intervened.
Interchange fees. When a card is used in a shop, the retailer’s bank pays a small fee to the cardholder’s bank. In the UK these are capped for consumer cards at 0.2% of the transaction for debit cards and 0.3% for credit cards. Some banks pass part of that income on as rewards.
Fees and packaged accounts. Monthly-fee accounts bundle insurance, breakdown cover or other benefits. They can be good value for people who would buy these anyway, and poor value for those who would not.
Why charges are different from one bank to another
Banks segment customers, so charges follow cost and behaviour:
- Overdrafts. Since April 2020 FCA rules require firms to price arranged and unarranged overdrafts the same way, with a single annual rate, and ban fixed daily fees. Before that, unarranged use was often charged at a higher level, with the effect that borrowers with the least slack paid the most.
- Foreign payments. Spending or withdrawing abroad can carry a loading on the exchange rate, a fixed fee, or both, which compensates the bank and its card network for converting currency. Some accounts and cards waive these costs.
- Faster Payments and Bacs. Domestic payments between UK accounts are generally free for consumers. Same-day high-value CHAPS payments, which carry higher processing costs, usually attract a fee.
- Paper, cash and branch services. Some fees reflect real handling costs, such as cashing cheques, replacing cards urgently or providing paper statements.
What regulation has changed
The Consumer Duty, in force since July 2023, requires firms to deliver good outcomes for retail customers, including ensuring that the price paid is reasonable relative to the benefits received. Firms must monitor outcomes and act on evidence that groups of customers are getting poor value. This does not cap most fees, but it gives the FCA a basis to challenge ones that do not stand up.
Customers also have the Current Account Switch Service, which moves an account, direct debits and payments to a new provider within seven working days and redirects payments for a period afterwards. And when a complaint cannot be resolved with the bank, the Financial Ombudsman Service provides a free route for individuals.
Practical ways to keep charges down
- Check the account’s fee schedule for overdraft rates, foreign card charges and any monthly fee, and compare with what you actually use.
- Avoid unarranged borrowing. Even under the unified pricing, going over a limit can trigger additional consequences such as refused payments.
- Use a card without foreign loading for overseas spending if you travel.
- Review packaged accounts yearly against buying the benefits separately.
- Look at the interest on balances, since a “free” account that pays nothing on large balances has its own cost. See the way payments move through the system for why domestic transfers are cheap, and how to audit recurring costs for the charges that repeat every month.
This is general information, not financial advice. Fees, rates and rules vary by provider and change; check your own account terms.
Sources: Financial Conduct Authority, overdraft pricing rules (PS19/16) and Consumer Duty guidance; Current Account Switch Service information from Pay.UK; Financial Ombudsman Service; GOV.UK and Payments Systems Regulator information on interchange fee caps.
