Basic bank accounts are a type of current account which offer very limited functionality and benefits. Despite the limitation of basic bank accounts, they remain very popular because they are designed for people who need access to some form of bank account, but who are unable to access traditional bank or building society accounts, usually because they have a poor credit history.
Despite having a more limited choice, it is still worth customers comparing accounts to get the best deal. Our basic bank account comparison table below is a good place to start.
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As the name implies, basic bank accounts are bank accounts with limited functionality, and fewer of the benefits available to customers of more mainstream accounts.
Actual functionality and benefits vary from bank to bank (or building society) and although basic accounts undoubtedly differ from more mass market current accounts, many customers may not notice a difference on a day to day basis
In many respects, what is surprising about basic accounts is not the functionality they don’t offer, but that which they do.
Basic bank accounts are available from the same high street banks and building societies as more main stream current accounts. Their customers are serviced by the same staff, in the same branches and call centres, and have access to the same ATMs to withdraw money. Issuers offering basic bank accounts typically offer the same debit cards, and can also arrange standing orders and direct debits to pay for goods and services. Furthermore, their online banking is protected by the same sophisticated technology as more conventional bank accounts and a customer’s savings are protected by the same government backed protection scheme (the FSCS) as other mainstream account holders.
Indeed, there are only a few points of difference between basic accounts and other current account in terms of day-to-day banking. Those being elements like access to an overdraft, access to a cheque book, access to cash back (or other account rewards) and likelihood that an account is to pay interest on in-credit balances. The other difference customers comparing basic bank accounts are likely to notice is that they offer none of the cash switching incentives available on some other accounts.
The simple reason for these differences is that basic bank account customers tend to be less profitable for the banks (because by offering no overdraft facility the bank loses one of its main sources of revenue). Also, such customers have fewer opportunities to switch to a competitor bank, so the banks do not need to compete as aggressively as they might for other customers.
Although anyone who meets the age requirement (16-18 depending on the account) could apply for a basic bank account, they are really designed for people with poor credit who are unable to access other types of current accounts, because they simply wouldn’t pass the credit check they are obliged to undertake on application.
Although the fact that many of these accounts don’t tend to offer customers an overdraft means providers can accept a greater percentage of applicants than other account types. This does not however mean that they accept everyone. People who have be convicted of fraud (which can range from multi-million pound tax fraud to fare dodging) are unlikely to be accepted for even a basic bank account, and will have to look elsewhere for banking facilities.
N.B. If the account you are applying for requires you to be ‘credit checked’ before they accept you as a customer they should notify you (often they will do this in the small print). This check is what is known as a ‘hard search’ of your credit report(s), and the fact that it been requested will be visible to other organisations you permit to view your credit report(s), which could reduce your prospects of accessing other credit based products (like credit cards and personal loans).
Like other bank accounts, basic bank accounts, can be a useful tool for managing money. There are many specific reasons for this, but they broadly split into three areas.
Bank accounts are very good at enabling us to simplify our payments. They do this by offering debit cards which we can use to directly purchase goods in a shop (rather than using money) or with which money can be withdrawn directly from an ATM (rather than going into a bank to withdraw via a counter clerk).
Another way bank accounts help us to manage our money is to automate many of our ongoing payments with direct debits or standing orders. This is advantageous because it reduces the risk of a missed bill in the post, or having to write a series of cheques every month to cover ongoing payments. Direct debits also have the wider benefit of making the businesses we transact with more efficient. They are therefore able to reduce the number of staff they employ in their collection department. This obviously results in lower overheads and these savings are often passed on to customers paying by direct debt in the form of lower pricing.
N.B. With a basic bank account you are unlikely to be given an overdraft. This means if a request is made for payment of a direct debit or standing order and you do not have the funds available in your account, the bank will not make the payment. They will notify you of this and probably charge you a fee. You will then still be liable for the amount owed and the banks missed payment fee, but you might find you are charged another fee by the organisation (or individual) who the monies were due to be paid to. This demonstrates why it is very important to always have enough money in your account to pay your monthly bills.
Bank accounts are also useful for tracking how much money we have. Without a bank account an individual would need to continuously write down what they had spent and what they had received, so they understood how much money they had. Bank accounts enable us to leave the recording of our cash in-flow and out-flow to our bank. We can then view these items in our monthly bank statement. And if you need a snapshot of your account prior to a monthly statement being available, you can log in to your online banking, call your bank’s call centre or use an ATM to get your ‘balance on screen’ or generate a ‘mini statement’ (a small statement printed on the paper otherwise used to print transaction receipts at an ATM).
One of the main benefits of using a bank account rather than hoarding your money is the protection a bank gives against theft or destruction. People often jokingly suggest that they have hidden money in their mattress, but of course if their house burnt down they would lose everything. Equally without the encrypted payments banks enable us to undertake, making online transactions would be a very perilous exercise.
Banks and building societies are legally required to confirm the identity of new account holders to help prevent money laundering and other criminal activity. To do this they require both proof of identity and proof of address. So before applying for an account, you should ensure that you have at least one of the following documents for each category.
N.B. Different banks and building societies may require different documentation, so be sure to check the specific requirements of your desired provider prior to application.
Proof of identity
Proof of address
In recent years, sensing the limited choice available to traditional basic bank account customers, a number of alternative products have been launched, that offer much of the functionality of a ‘basic bank account’ but with a lower threshold requirement for acceptance.
These products almost exclusively use the functionality of prepaid cards to provide the core of their functionality, whilst adding additional elements like the ability to pay direct debits. And the reason they are able to lower the acceptance criteria is that they are all ‘paid’ products.
Some charge monthly fees, whilst others charge for individual actions (like withdrawing money from an ATM), but all charge directly in a transparent manner, unlike traditional basic bank accounts that are seen to be ‘free’ as the banks can make money from the interest they can generate on customers balance and charges thy can levy for certain actions.
Given the levels of automation banks now use to run our accounts, mistakes are rare. However, they do occur and it wise to always check your statement for errors of unexpected withdrawals. If you do find something you should first contact your bank and ask them to investigate/remedy the situation – They should respond within 8 weeks.
If you are not happy with the bank’s decision or explanation, you can report the matter to the Financial Ombudsman Service (FOS). The bank should provide details on this process.
If your bank becomes insolvent, and it is a UK bank (check here), your balance will be protected by the Financial Service Compensation Scheme up to £85,000 (until 31st December 2015) and £75,000 (from the 1st January 2016). If your balance exceeds this amount you should consider opening an account with a rival institution (Ensure this is a different banking group as customer compensation is allocated at an institution level – not by brand).