The UK’s ninth-largest bank, Alliance & Leicester,
is replacing interest charges on overdrafts with a daily fee for
customers who go overdrawn. The move is part of an overhaul of its
fee structure as it seeks to maintain its growing share of the
valuable UK current account market. Douglas Blakey

Alliance & Leicester (A&L), the UK’s ninth-largest bank
by assets, is to stop charging its current account customers
interest on their overdrawn balances, an innovation which the bank
claims is a first in UK retail banking. Instead, A&L will
charge customers who make use of an agreed overdraft facility a
daily fee of £0.50 ($1) up to a maximum of £5 per month, provided
the agreed overdraft limit is not exceeded.

Up to now, A&L customers using an authorised overdraft have
paid interest of between 6 percent and 17 percent per year.

Customers who exceed their overdraft limit or who have an
unauthorised overdraft will pay increased fees of £5 per day with
no monthly cap set, meaning that customers who exceed their limit
for one month would have to pay up to £155. Currently, A&L
charges unauthorised borrowers a fee of £25 on day one and another
£25 five days later if the customer continues to exceed the
overdraft limit.

“Alliance & Leicester is the first UK bank to abolish overdraft
interest for all its customers. The changes we are making mean that
customers using their agreed overdraft will never pay more than £5
per month,” said Andy Bayes, head of current accounts at

A&L’s charge for agreeing to pay a cheque, direct debit or
standing order while a customer is overdrawn without the bank’s
prior agreement remains at £25 per item, but the bank is reducing
from £34 to £25 its fee for bouncing a cheque.

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Significant changes in the UK

The move by the bank comes at a time of significant
change in the UK’s banking industry. In the past month, UK banks
Abbey, Lloyds TSB, HSBC and HSBC’s direct banking subsidiary, first
direct, have all overhauled their overdraft policies in the face of
a consumer – and political – storm over bank overdraft charges, but
the A&L changes appear to be the most radical.

The future of free current account banking in the UK has been
considered by many observers to be under threat (see RBI
in particular as a result of an investigation into bank
fees being conducted by the UK Government’s Office of Fair Trading
(OFT). “Alliance & Leicester is committed to offering free
banking for customers who stay in credit and our research confirms
that 94 percent of people agree that having a bank account should
be free,” added Bayes.

The OFT has raised a civil action against seven UK banks and one
building society on the legality of banking default charges; a
court hearing is scheduled for January next year.

In advance of the court action being resolved, a number of UK banks
have announced changes to their fees structure.

In mid-September, Lloyds TSB, for instance, said that it will
reduce its unauthorised overdraft fee from November, from £30 per
day to £6, and cut the unauthorised rate from 29.8 percent to less
than 20 percent. Lloyds TSB is also introducing a grace period,
enabling customers who go overdrawn or exceed their limit to
contact the bank before 3.30pm that afternoon to bring their
account into line, avoiding payment of charges.

first direct has abolished deposit interest on its current accounts
but has announced plans to offer interest-free overdrafts for
balances up to £250 in the red. And at the start of September, HSBC
announced it was programming its 3,500 ATMs to tell customers if
and when a cash withdrawal will cause them to exceed their
overdraft limit. So far this year, HSBC has paid out £120 million
in overdraft refunds.


Increasing share of market

A&L is hoping that its new overdraft strategy will help it in
its goal of increasing its share of the UK current account market.
In the first half of the year, A&L opened 170,000 new current
accounts, 12 percent more than in the same period for 2006,
increasing its active account base to 1.68 million accounts.

The bank estimates that its market share of new current account
openings was 4.9 percent in the first half of the year, compared
with its 2.9 percent share of the current account market

A&L’s distribution strategy has been among the most innovative
of all UK banks. Some 35 percent of new A&L current account
customers opened their account through direct channels in the first
half of 2007, as did 49 percent of new A&L savings account
customers. Some 35 percent of sales of A&L’s four core retail
banking products – current accounts, mortgages, personal loans and
savings – are now made online.

The attraction of new current account customers to A&L is
apparent from its cross-sell statistics. The bank reports that
current account customers hold on average around 3.5 A&L
products, and says over half of all its current account customers
also have a deposit account with the bank.

An increasing share of the current account market represents rare
good news for A&L, which has long been seen as possible
acquisition target and has suffered a recent fall in investor
confidence off the back of the collapse of troubled UK mortgage
lender Northern Rock. A&L’s share price has fallen below £8 to
a five-year low, after peaking at £12 on talk of a takeover bid
early this year.

In July last year, France’s largest banking group, Crédit Agricole,
walked away from buying A&L, opting instead to snap up Emporiki
Bank of Greece.