Topic 4: Everyday Banking Flashcards
Choosing a current account:
Most adults use a current account for their everyday banking needs, such as receiving payments, storing money for short periods of time, making payments and accessing cash. There are current accounts designed for people aged 11 and over and others that are only available once people are 18 because they include the facility to apply for overdrafts. Young people often use a savings account for everyday banking because their main requirements are to store money and withdraw cash
When people choose a current account they look for an account that matches their everyday banking needs - for example, to be able to make automated payments such as direct debits and to bank online. Some current accounts are free to use as long as the account is in credit; for others, people have to pay a fee because extra services are available with the account
Current accounts are available from banks and building societies. They are also available from retailers such as Marks and Spencer, which offers packaged accounts operated by M&S Bank, a wholly owned subsidiary of HSBC. This means that M&S bank branches are open whenever the stores are open, including in bank holidays, Tesco also offers current accounts through its wholly owned subsidiary, Tesco Bank
All current accounts offer regular statements online or on paper to enable people to monitor their transactions. Other facilities vary from account to account. Paper statements are increasingly unpopular, with many customers preferring online or
mobile statements and choosing to go ‘paperless’
Different types of current account:
There are a number of different types of current account including:
- standard current accounts, offering a full range of payment methods including debit card and cheque book
- packaged accounts, which charge a fee for including additional services with the account, such as travel insurance and car breakdown cover
- basic bank accounts, which offer a debit card and/or cash card but no overdraft or cheque book
- student accounts, often with an interest-free overdraft
- youth accounts (for people under 18 years old)
- premium accounts (for wealthy customers)
Basic bank accounts:
A basic current account suits people who wish to avoid borrowing, such as those living on benefits or low incomes or people who have not held a current account before. This type of account usually offers a debit card or a cash card but not an overdraft or a cheque book, thereby limiting the possibilities of getting into debt. Most basic current accounts can be operated free of charge; however, people with a history of fraud or who are bankrupt may need to pay a set-up charge and/or a monthly service charge
People may choose to operate basic current accounts using cash cards or pre-paid cards. Pre-paid cards can be loaded with funds from the account and then used to make purchases anywhere that the card brand is accepted. Most basic current accounts offer direct debits and standing orders to pay bills. Providers will not make these payments, however, if the account does not have sufficient funds to pay the transaction
Basic bank accounts were introduced in 2004 as part of the government’s plans for financial inclusion - that is, ensuring that people have access to banking services. The government agreed a ‘shared goal’ with the main high street banks to halve the number of people without bank accounts by 2009. Research quoted in the HM Treasury report, ‘Realising banking inclusion: The achievements and challenges’ (Ellison et al, 2010) identified that people without a bank account are disadvantaged in a number of ways. One of the key problems is that they cannot pay by direct debit. As a result, they are unable to take advantage of any services that require regular electronic payments, such as mobile phone contracts or internet access. They pay higher energy costs because they use pre-paid meters rather than direct debits: energy companies often offer discounts to people who pay by direct debit. They also cannot make payments over the telephone or online
In 2004 approximately 2.7 million people in the UK did not have a bank account. By 2010, 1.1 million of these people had opened a bank account with 7 out of 10 of them opening a Post Office Card Account. The Post Office’s contract with the Department for Work and Pensions will cease in November 2022 which means this these individuals will need to change accounts
According to the Office of Fair Trading’s 2013 report into current accounts, in 2011 9% of active accounts in the UK were basic bank accounts. An active account is one that has had a transaction within the last three months
Figures from 2016 show an increasing number of basic bank accounts on offer across 36 banks
Youth accounts:
Youth current accounts are available for people aged under 18 years old. These current accounts do not offer overdraft facilities because people need to be aged 18 or over to enter into a contract to borrow money. Youth current accounts offer a range of services, depending on the account and the age range of the intended account holders. For example, cash cards, debits cards, standing orders and direct debits, a cheque book, online banking, mobile banking and text alerts are often available on accounts for people in the 16-19 age group, while accounts for those aged 11-15 often offer cash cards or debit cards
The Office of Fair Trading (OFT) 2013 report on current accounts identified that just 2% are youth accounts. This is probably because many young people use savings accounts to manage their money instead of current accounts. People often get their first current account when they start work and their employer wants to pay them electronically
Standard current accounts:
Standard current accounts offer the full range of current account facilities, such as receiving payments, a cash card or debit card, direct debits, standing orders, overdraft, cheque book, online banking, mobile banking and text alerts. Standard current accounts are usually free of charge unless the account holder uses the overdraft facility or requests services that incur a charge, such as another copy of their statement
Standard current accounts suit most people who wish to pay bills by direct debit, manage their money using a variety of communication channels and borrow money for short periods of time. Text alerts can be particularly useful to tell account holders when their balance is low so they can avoid going overdrawn. According to the Office of Fair Trading’s 2013 report, 67% of the current accounts used in the UK are standard accounts
Student and graduate accounts:
These accounts are variations on the standard current account tailored to the needs of students in higher education and recent graduates. The key features are a low-interest or no-interest overdraft facility and incentives such as discounts on contents or travel insurance policies. Providers wish to attract students to their current accounts as some will be high earners in the future. Student accounts make up 3% of the current accounts used in the UK, according to the Office of Fair Trading’s 2013 report. This is probably because student current accounts are only available to people who are studying. Once students graduate, they need to switch to a graduate or standard current account
Interest paid when in credit:
Some current accounts may pay interest on credit balances. An example is the FlexDirect account from Nationwide Building Society, which pays interest at 2% AER fixed for a year on £1,500, before dropping to 0.25% in the second year
There are usually conditions attached to these current accounts, such as paying in a minimum monthly amount, keeping the account in credit, or banking online or by telephone. Interest is paid on balances between certain minimum and maximum amounts. There may also be fees for holding the account
People who usually have a budget surplus may find these accounts suit their needs. Caution is required, however, as going overdrawn on these accounts can incur charges that are greater than the interest or reward paid. Further, some accounts require a minimum balance to be maintained, such as £1,000, and people may find that their surplus can earn higher AERs in savings accounts that have fewer withdrawal restrictions
Joint accounts:
Joint current accounts are held by two or more people. Most types of current account can be held in joint names. Joint accounts suit people who share finances, such as married couples and those in civil partnerships, and people sharing a rented home
A joint account is probably not suitable for people who have different priorities or attitudes to managing money. If they wish to pool some incomings in a joint account to pay for joint outgoings, account holders may wish to draw up clear rules for how the account will be operated and who will be responsible for managing it. The provider will need to know who can withdraw funds from a joint current account and if a signature is required from more than one of the account holders to make a withdrawal. If joint accounts become overdrawn then all account holders are responsible for repaying the full amount. In some circumstances providers cab take money from one person’s account to repay the overdraft on a joint account that bears their name
Packaged accounts:
Packaged current accounts offer account holders extra benefits for a monthly fee. Benefits may include mobile phone and travel insurance, car breakdown cover, discounts in stores and subscriptions for media services. The account fee can vary from £2 to £20 or more per month, and the benefits vary from account to account. According to the Office of Fair Trading’s 2013 report, 17% of UK current accounts are packaged accounts
People may find packaged accounts suitable if the costs of the benefits they will use are greater than the annual account fee
Premier accounts:
Premier accounts are designed for wealthy customers and offer a range of additional services, such as a personal banker to help account holders manage their finances and banking products. Account holders have to have a certain level of income and/or funds to save or invest to be eligible for premier accounts - for example, earnings of £75,000 or more. According to the OFT report, only 1% of UK current accounts are premier accounts
Opening an account:
Before anyone can open any new account, including a current account, they must supply the provider with proof of their identity and address. This requirement is designed to prevent money laundering and is set out in the Money Laundering Regulations 2007. Money laundering is the term used to describe the ways in which criminals can use accounts to hide the source of their funds (for example, drug-dealing) and to make payments in support of their activities (for example, terrorist activities). Providers who do not follow the legal requirements face heavy fines. For example the Financial Conduct Authority (FCA) has previously fined a private bank £4.2 million for failing to take reasonable care to establish and maintain effective anti-money-laundering controls over a period of more than three years (FCA, 2013)
Providers need separate proof of identity and address so one document cannot be used to prove both. When people show providers their documents in branch, the documents must be originals rather than copies or print-outs from internet sites.
Photographic identification documents such as passports and UK drivers’ licences must be current - the provider will not accept them if they have expired. If people apply for an account online, they may be asked to send documents by post, show
them to the local branch or upload copies online. Posted documents can sometimes be photocopies, especially if they are signed by a professional such as a lawyer, accountant or doctor to confirm that they are true copies of the originals, and that the person signing has seen the originals. Applicants need to check with their provider which documents are accepted as it can vary from provider to provider and account to account
People who are on benefits, who are young or who do not pay bills can find it difficult to prove their identity and address because often they do not have the types of document required. In these cases, providers will accept other documents: for example, people on benefits might use an entitlement letter issued by the Department for Work and Pensions (DWP), HM Revenue and Customs (HMRC) or a local authority, or an identity confirmation letter issued by DW or a local authority. Young people may be able to use birth or adoption certificates as proof of identity; they would also need a confirmation letter from their school/college/university/care institution or their employer, stating their name, address and details of their educational or employment status. This letter needs to have been issued in the last 12 months. Students may be able to use their UCAS letter. For some accounts designed for very young children, the parents’ or guardians’ identification and address details are taken instead
Providers can refuse an application to open an account. This may happen if the provider thinks that the applicant would not be a profitable customer. Providers can also suggest that people open a different type of account
According to the former British Bankers’ Association (BBA) the following are often accepted by providers as proof of identity or a UK address:
- gas, electricity, water or phone bill that is less than three months old
- council tax bill issued within the current financial year
- driving licence issued in the UK (photo card and full paper counterpart with current address)
- current passport
- employer’s ID card if the employer is known to the provider
- pension or other social security book
- medical card
- HMRC documentation
- insurance certificate issued in the last 12 months
- mail order statement that is less than three months old
Monitoring transactions:
It is important that people check their current accounts to ensure they have sufficient money to pay transactions that are due, that they are keeping to their budget and that mistakes have not been made. People can use statements that are provided online, on paper and via ATMs to monitor their transactions. Statements are usually provided once a month for current accounts, unless very few transactions are made, in which case they may be provided less frequently
Statements often use abbreviations to describe transactions, and each provider can devise its own. For example, money paid in by electronic transfer may be referred to as a DC (direct credit), Bacs transfer (Bacs is the central payment system used to process several different types of electronic payment, especially direct credits) or BGC (bank giro credit). Direct debits may appear as DDR, DD or BD. Providers usually explain the codes on the statement and/or on their website or current account literature
Cheques will usually appear as the number of the cheque. It is therefore very important that people write the details of the payee on their cheque books so they know where the money has been paid
Account statement terms: DCD, DCR, DD, SO, OP, Wdl, XF
- DCD - Debit card
- DCR - Direct credit
- DD - Direct debit
- SO - Standing Order
- OP - Online Payment
- Wdl - Withdrawal
- XF - Transfer
Switching and closing accounts:
Providers offer a free service for switching between accounts at different providers. They also offer a free switching process between accounts held at one provider - for example, students may switch from student current accounts to graduate accounts at the end of their course and from graduate accounts to standard current accounts after about three years.
People who want to close their current account can do so at any time and at no cost, although they must pay any fees and other money that they owe. They do not need to give a reason, although many providers will ask, for marketing research purposes.
People need to return their payment cards and cheque books when they close their account. The provider may need to delay closing the account if there are automated payments due or cheques written on the account that have not been presented for payment. People will need to tell the provider where to pay the balance on the account - for instance, by a cheque made payable to the account holder or a transfer to another account. Sometimes a provider will close a current account, for example if the customer no longer meets minimum deposit criteria. In these cases the provider must give at least two months’ notice
