Losing interest: how banks are neglecting Britain's low earners

Competition between banks and building societies for the attentions – and spending power – of top-earning customers is leading to a marked divide in the current account market. There are now three tiers of bank accounts: those with rates in excess of 5 per cent available to high earners; accounts with more modest rates for people on lower incomes; and basic bank accounts that pay little – if any – interest, available to those on the lowest rung of the financial ladder.

This month, Nationwide building society announced that it is to introduce a tiering structure on its FlexAccount: as of August, people who pay in between £1,500 and £3,000 a month will earn 3.5 per cent; those with £1,000 to £1,499 will earn 2 per cent; and those with £500 to £1,000 just 0.5 per cent. If you pay in less than £500, or more than £3,000, into your current account, you earn 0.1 per cent.

"We don't view this tiered approach favourably," says Paul Davies, head of money research at the consumer group Which?. "The higher proportion of Nationwide customers will be getting a lower rate. People are being penalised simply for having a low income."

The divide between the most generous current accounts and those for people on low incomes is now wider than ever. Michelle Slade, an analyst at Moneyfacts, the financial information provider, says: "There is a massive 4.5 per cent difference in the top rates of credit interest for those customers who can afford to fund their current accounts regularly with amounts over £500 per month and those who can't."

While that last figure amounts to net pay of just £6,000 a year, some accounts demand much higher levels of funding. Abbey, Coventry building society, Halifax and Lloyds TSB all require funding of at least £1,000 a month, while Norwich & Peterborough's Gold Current Account requires minimum funding of £1,500 a month, equivalent to net pay of £18,000 a year. Yorkshire Bank's Current Account Tracker pays 4 per cent a month but is open only to those with an income of £75,000 a year, more than three times the national average wage.

"There are some decent rates out there with no minimum monthly funding requirements," says Mr Davies. "Intelligent Finance and Cahoot are two examples, although they of course penalise people who don't have internet access."

Andrew Hagger of the price comparison site Moneynet notes that if you are on a low income and want access to the best rates, you have to pay a fee. "The Halifax Ultimate Reward current account pays 5 per cent gross if you're prepared to stump up £10 a month," he says. "HSBC's Bank Account Plus pays 7.72 per cent for a £12.95 monthly fee – although admittedly these accounts offer other benefits as well."

In contrast to the tempting rates on offer to top earners, those at the bottom tier of the banking pecking order are lucky to receive any interest at all. "Rates on basic bank accounts are terrible," says Ms Slade. A notable exception is Coventry building society, paying 3.15 per cent on its basic account. A handful pay 0.1 per cent, but the majority pay no interest at all. Basic accounts, which offer no overdraft facility, are usually offered to people who have had credit problems in the past.

Mr Hagger says that the gap between accounts catering for the rich and the poor is likely to become a permanent feature of our banking system. "The divide has been in evidence for a few years, but it is very unusual nowadays to see an attractive new current account deal launched to those with less than £1,000 per month to pay in."

The trend towards tiered accounts is driven by the desire to cross-sell. "Financial institutions make very little money from your current account," says Mr Hagger, "but by attracting that business via tasty credit interest rates, the bank or building society gains access to a whole host of your personal financial information and can then set about cross-selling lucrative insurance, protection, pension and investment products."

But is worth noting that although banks are prepared to offer great rates of interest to higher earners, this interest is usually capped: Moneyexpert says that of the 12 high-interest current accounts paying rates of 5 per cent or more, just one – Coventry building society's First Account – maintains the headline rate above the £2,500 point. On the other accounts, the pay rate on balances above £2,500 falls sharply, to an average of 0.58 per cent.

And although there are some excellent accounts out there – if you fall into the right income group – in general, rates on accounts are falling while fees rise. "The credit crunch is still having a massive impact on all banks and building societies," says Ms Slade. "The effects are being felt in all aspects of personal finance, with current accounts the latest area to feel the pinch."