Current Accounts are a loss leading product for banks

Current accounts are used to provide customers with easy access to their money. They allow you to be able to deposit funds which can then be withdrawn either from an ATM, via a transaction, or directly from your bank. They also provide the direct debit feature which allows you to set up regular payments such as utility bills that can be automatically paid periodically. Many accounts also offer online banking enabling customers manage and monitor their finances.

Current Accounts are seen by almost all banks as a ‘hook’ or a ‘way in’ to supplying you with your overall financial requirements. Most banks don’t actually make money out of providing you with a current account, once they take into account things like withdrawal and deposit costs, which carry overheads such as cashier staff, ATM networks maintenance or provision of online banking systems.

The banks therefore do not provide this service from the kindness of their heart, far from it. They provide it with the sole purpose of attracting you to them and getting an insight into your financial affairs. Once they have done this they can then cross-sell you into other, more lucrative products, such as credit cards, savings accounts, loans and mortgages, as and when the opportunity arises.

It is important therefore that you remember a bank is trying to give you a golden handshake when offering you a bank account. It is trying to open the door to future business with you. Gone are the days of the ‘standard’ current account offering 0.1% AER and nothing else. Banks are now competing against each other for the chance to win this lucrative relationship, offering better interest rates (some up to 6.5% AER) and other benefits such as 0% overdraft facilities.

As Current accounts are primarily used for transactions, interest rates are generally low on balances. However, some current accounts do offer higher rates of interest used to attract customers, although the high rate is usually only offered up to a specified amount, then anything over is capped at a low rate. For example 8.5% on the first £2,500, then 0.10% on anything over £2,500. Some high interest current accounts only offer these high rates for an introductory period, so always check how long the offer is active for. If you are keen to make high interest savings it may be worth looking into a feature such as sweeping which is used to transfer excess funds from your current account into a high interest savings account.