Free banking for small business

THE Big Four banks have agreed to provide free banking to small businesses. After months of pressure Lloyds TSB, Barclays, HSBC and the Royal Bank of Scotland/NatWest came up with a deal that will save 3.5m firms up to £725m a year.

They will pay interest on current accounts for the first time at a rate no lower than 2.5% below the base rate, at present 4%. Alternatively, the account holder could opt for free banking, avoiding handling charges for cash and cheques.

The plans, which must be introduced by 1 January, will be seen as the first step in a radical shake-up of the market.

A study published by the Government in March confirmed that the Big Four enjoyed a 'complex monopoly', controlling 90% of small business accounts in England and Wales but ' offering the same poor value and high-cost services'.

Chancellor Gordon Brown, who announced the changes in the Commons on Thursday, believes profiteering by the banks has stifled the entrepreneurial spirit of Britain. The Big Four are expected to reveal £8bn profits for the first six months of this year.

David Bishop, of the Federation of Small Businesses, said: 'The announcement is highly welcome and long overdue. It is important that the process continues and we push for other reforms as soon as possible.'

Which?, the consumer magazine, demanded that the banks extend their moves to ordinary account holders who receive low interest on the current accounts. Currently they pay a paltry 0.1% on current account credit balances.

Ashleye Sharpe, head of money research at Which?, said: 'This long overdue announcement will re-awaken the anger of the 25m Big Four customers who currently receive virtually no interest on their current accounts.'