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Checking out Tesco's new current account: Banking It offers 3% interest, is generally free and you even get points. Rupert Jones asks if every little will really help this time

June 14, 2014

Rupert Jones

Tesco this week continued its apparent quest for world domination with the long-awaited launch of its first proper bank account. The Tesco Bank current account offers 3% interest on credit balances, Clubcard points on all debit card spending, and a "simple and transparent" fees and charges structure.

Tesco Bank, 100% owned by the retailer, already has six million customers and there are 16 million-plus people with a Clubcard in their wallet or purse, so it is arguably in a strong position when it comes to marketing the new account. The initial reaction from commentators has been broadly positive, but are the "carrots" on offer enough to tempt you to switch? How does it stack up against the competition - and are there any nasties in the small print?

A "digital" bank If you're the sort of person who still values being able to go into a bank branch, the Tesco account probably isn't for you. Tesco says that "fundamentally, this is a digital business", with the emphasis on online and mobile banking, backed up by UK-based call centres. You can, however, request a chequebook.

Those who sign up will be able to pay money into their account at more than 300 Tesco stores, but there won't be full-blown branches in these stores. Instead, you'll have to use the customer service desk, which presumably might mean having to queue up behind people trying to get refunds and return items.

You can't open an account in store - you have to apply online or over the phone.

A free account? It is only free if you pay in at least pounds 750 a month. For those who don't - which could include many low earners - there's a pounds 5 monthly fee.

In-credit interest Some current accounts pay nothing, others as much as 5%. Tesco Bank is paying a flat 3% on credit balances up to pounds 3,000. The good thing about this rate is that it is not an introductory deal that will expire after perhaps 12 months.

TSB's Classic Plus and Nationwide's FlexDirect pay 5% on balances up to pounds 2,000 and pounds 2,500 respectively, though the Nationwide rate is an introductory offer, fixed for 12 months, after which it drops to 1%.

Alternatively, there's the Halifax Reward current account where, provided you pay in pounds 750 or more per month and meet the conditions, the bank will credit your account with pounds 5 each month (net of tax - the gross amount is pounds 6.25).

Meanwhile, Lloyds Bank recently launched a current account called Club Lloyds that pays up to 4%. However, you only get that on balances of between pounds 4,000 and pounds 5,000. On balances of pounds 2,000 to pounds 3,999, the rate is 2%, while on pounds 1 to pounds 1,999 it is only 1%.

Arguably the stand-out option for the well-off is Santander's 123 account. That's because it pays 3% on balances from pounds 3,000 all the way up to pounds 20,000. Over a year, the 123 account will pay interest of pounds 592 gross on a pounds 20,000 balance, whereas the most you could earn with Tesco is around pounds 90 a year - but not many people will have 20 grand in their account, of course.

Santander's rates for smaller balances are 1% on pounds 1,000-plus, and 2% on pounds 2,000-pounds 3,000. The 123 account's big downside is the pounds 2 monthly fee.

Ongoing rewards You won't get rich with the Tesco account. The debit card doubles as a Clubcard, and customers will be able to earn points wherever they use it. They will receive one Clubcard point for every pounds 4 of debit card spend at the retailer, and one point for every pounds 8 spent elsewhere, though there are some exclusions.

But points out this isn't as generous as the rate offered on Tesco's credit card, where you get five Clubcard points for every pounds 4 spent in Tesco stores and at its petrol stations, and one for every pounds 4 spent elsewhere.

In fact, even someone who spent a huge pounds 2,000 a month on their Tesco debit card would only earn pounds 40 in Clubcard points per year, assuming a 30/70 split of Tesco/non-Tesco spending. Some may wonder whether it's worth the effort.

Overdrafts Some banks give you a small "buffer" overdraft of perhaps pounds 10 for free, but others are more generous - for example, M&S Bank's new current account comes with a pounds 500 overdraft, the first pounds 100 of which is interest-free, and there are no overdraft fees. Above this amount, the interest rate is a low-ish 15.9% EAR. Like the M&S account, Tesco Bank's new offering scores quite well because of its simplicity. Again, there are no daily or monthly overdraft usage fees; however, the interest rate is higher at 18.9% EAR.

Tesco says its costs compare well with others - someone who goes overdrawn (authorised) by pounds 221 for three days a month, would pay 34p a month, it says. That compares to Santander, whose 123 account imposes an authorised overdraft usage fee of pounds 1 a day.

Another plus of the Tesco account is the extended "grace period" to help customers avoid unauthorised overdraft charges. Customers automatically get a text and email to tell them to pay in funds, and won't be charged provided they pay enough before 5pm that day.

Golden hellos It's perhaps surprising that Tesco has decided not to go down the "golden hello" route, when others will pay you to switch. The Halifax, First Direct, M&S Bank and the Co-operative Bank are among the players offering pounds 100 to new current account customers.

On holiday The Tesco debit card charges a foreign exchange fee of 2.75% on overseas purchases and cash withdrawals, plus an additional 1% for withdrawing money from an overseas ATM.


Polishing up the brand: Tesco has launched a no-frills current account

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Source: Guardian (UK)

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