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Warning over basic bank accounts

Banks are cutting back on the services offered through no-frills cash accounts.

Banks are jeopardising the success of no-frills bank accounts set up to help vulnerable and low-income customers by cutting back on the services offered through them, a report warned today. 

Consumer Focus called for banks to voluntarily agree a minimum set of standards for basic bank accounts, which are held by a fifth of the adult population as their only or main account. 

The accounts were set up nine years ago to allow "unbanked" consumers access to mainstream banking by making it easier for them to have an account which they can use to pay in wages and any benefits. 

But the report said "dark clouds" are gathering for the future of basic bank accounts and without intervention the banks could start a "race to the bottom", resulting in less useful and more costly accounts for those who are already struggling to get by. 

There are an estimated 8.4 million basic bank accounts in the UK and they are growing at a rate of more than 500,000 every year. 

But Consumer Focus said banks are wary of increasing their market share of such products because they tend to be less profitable. 

They are used by people who do not necessarily meet banks' minimum criteria to open a personal current account, possibly due to a poor credit history, and they generally come without overdrafts and chequebooks. 

The document, titled the Best of British Banking, comes after Royal Bank of Scotland Group, including RBS, NatWest and Ulster Bank, joined Lloyds Banking Group in withdrawing access for basic bank account holders to the Link ATM network. 

More recently, the Co-operative Bank stopped offering bank accounts to undischarged bankrupts, leaving Barclays as the only provider to this customer group. 

In August, the Treasury Select Committee urged RBS and Lloyds to remove their restrictions on cash machine use, saying the most vulnerable people in society would be affected. 

The report recommended banks should look to give people full Link ATM access as well as a temporary small overdraft facility which would be free of charge. 

Some accounts already offer a free £20 overdraft, for example, if the customer pays the money back within a week, it said. 

Three quarters of basic bank account holders said that getting cash from a cash machine is what they use their account most often for, which the report said underlines the importance of access to ATMs. 

It said banks should be "proud" of their achievements in setting up basic bank accounts and the proposed changes would mean all banks match best practice. 

They would also make the accounts more attractive to nearly a million people who are still without bank accounts, the report suggested. 

Mike O'Connor, chief executive at Consumer Focus, said: "The last thing these consumers need is a race to the bottom between banks which keep chipping away at the features these accounts offer. 

"Without intervention these accounts could become less useful or more expensive for low-income consumers. 

"We are calling on banks to work with government and regulators to produce minimum standards for basic bank accounts. They will never be the most profitable of financial services for banks." 

The report found that a fifth of basic bank account holders opened the account mainly to have their wages paid in. Three quarters said they use their account to take out cash and pay for shopping. 

The Treasury Committee said it has had confirmation from several providers including Bank of Ireland, Clydesdale and Yorkshire Bank, the Co-op and Nationwide that they have no plans to restrict cash machine access for basic bank account customers. 

Similar undertakings were given by Barclays, HSBC and Santander during the committee's inquiry into access to cash machines earlier this year. 

Committee chairman Andrew Tyrie said: "We have now obtained confirmation from other providers of basic bank accounts that they have no plans to restrict access to cash machines for these customers. That is a step forward. 

"However, the letters that I received make clear that this might change. That RBS and Lloyds should want to cut their costs is understandable. But the cash machine network is a cost shared by all banks; if one bank decides to withdraw from the system, it is more likely that others would be forced to follow suit." 

The Co-operative Bank said it would review its decision to stop offering basic bank accounts to new customers who are undischarged bankrupts if the rest of the industry does more to create a more level playing field. 

It said it had been forced to take the "difficult decision" not to accept any more of these customers because it was unable to sustain its own disproportionate share of them. 

John Hughes, managing director of retail banking for the Co-operative Bank, said: "In order to avoid a continued race to the bottom, what we need now is for the industry to work together to identify and introduce minimum standards so that fair access to basic banking facilities is safeguarded for consumers in the future."

Tuesday, 6th November 2012

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