Abbey opens its attack on big four

Abbey National is stepping up its efforts to wrest current account customers from the "big four" banks by offering higher interest rates on balances and charging lower overdraft rates.

Abbey said yesterday it would pay 3% on current account balances and charge 8.7% for an overdraft, at a cost of £25m this year, as part of its effort to win 1m more customers by the end of next year.

Both Abbey National and Halifax, which is now part of HBOS, have vowed to attract more of the country's 30m current account customers, some 70% of whom bank with one of the big four: Royal Bank of Scotland/NatWest, Lloyds TSB, HSBC and Barclays.

The big four typically offer 0.1% interest on accounts in balance and charge overdraft rates of 16%. They have dismissed the Halifax and Abbey offers of market-beating rates, by saying this is not what attracts customers.

HSBC insisted yesterday that people with one of its current accounts and mortgages would be more than £500 a year better off than with Abbey, the savings on the mortgage more than offsetting any lower current account return.

Andrew Pople, managing director of retail banking at Abbey, insisted consumers were chasing better current account rates. "We expect this will open the floodgates."

Bank customers tend be reluctant to move their current accounts, citing the hassle associated with transferring direct debits. Halifax insists that since it offered its new current account last year, which pays interest on balances two percentage points below base rates, it has taken a 25% share of new accounts, beating its traditional share of 6%.

Abbey, which until yesterday had been offering a lower overdraft rate than the big four, has faced criticism that it has been slow to compete with its larger rivals after the competition commission's ban on TSB taking it over last year gave a mandate to take them on.

Mr Pople said Abbey had been waiting for the introduction in November of an automated system to swap customer information about direct debits between banks.

He said Abbey had created 500 jobs to deal with applications from customers looking to move current accounts and predicted that 1m would switch accounts this year, compared with 500,000 in 2001.

Abbey's account differs from Halifax's because customers need to choose whether to take the interest rate on balances, which is only paid on accounts credited with at least £1,000 a month, or the lower overdraft rate. Customers will have to pay £10 to change between the two.

The City is yet to be convinced that competition for current accounts is about to explode. John-Paul Crutchley, banking analyst at Merrill Lynch, said: "It might prompt people who are disillusioned to move their accounts but I don't think people shop around."