Lloyds TSB offers net interest

Lloyds TSB yesterday reversed its strategy on current accounts by pledging to pay interest to customers who log on to the internet.

By announcing plans to pay interest of 3.2% on current accounts, Lloyds TSB became the first of the big four retail banks to copy moves made by HBOS and Abbey National to pay interest.

The big four - Lloyds TSB, Barclays, Royal Bank of Scotland/NatWest and HSBC - have traditionally paid 0.1% interest on current accounts. They have dominated the market with a combined share of more than 70%.

Mark Thomas, analyst at Fox Pitt-Kelton, said the move would cost Lloyds "tens of millions" of pounds for the first two years but added that the bank hoped to start making money after the third year by winning more business from customers.

Lloyds TSB, which has about 10m current account customers and a 20% market share, is paying interest with a catch. It will pay on current accounts to customers who use its website, although they can also continue to use branches.

Customers who pay in more than £2,000 a month will receive 3.2% and those paying in £1,000 will receive 2.53%.

The interest payments begin on February 10. From August, however, customers will need to log on to the internet site six times every three months to keep qualifying for the payment. This prompted Which? the consumer magazine which has been campaigning to persuade bank customers to switch to interest-bearing accounts, to call on Lloyds to extend its offer.

Current accounts are regarded as important by the banks because they are often the means to sell customers other products. Some banks such as Barclays are also competing for customers through all-in-one mortgage-cum-current accounts.

Eric Daniels, who becomes chief executive of Lloyds TSB in four months' time, denied that the bank was caving in to competitive pressure.

In the past two or three months customers had started to ask for interest on current accounts. This might have been because of the volatile stock market, he said.

Lloyds TSB shares fell 4.5p to 370.5p.