Fee-free provides competitive advantage

Banks offering fee-free transaction accounts have defied the sceptics and are reporting strong growth in customer numbers.

ING Direct said 90,000 customers have opened Orange Everyday accounts with them, a fee-free transaction account that was launched early last year. Account openings are still running at 700 or 800 a week, and around 30 per cent of those customers are new to the bank.

National Australia Bank launched its fee-free offer, NAB Classic Banking, in January last year. It said it has seen a 10-fold increase in the rate of new account openings since then.

Others are now getting in on the act. In February, Bank of Queensland launched its Day2Day Plus account, which has no fees and offers unlimited transactions.

When NAB announced its plan to offer a fee-free account, late in 2009, rivals and commentators said it was step too far.

Banks had reduced or abolished a number of exception fees earlier that year. They accepted that customers were unhappy with the cost of over-limit, late payment and overdrawn account fees, but many argued that there was no need to remove monthly account fees.

Their sense was that consumers accepted the monthly fees were fair and there would be no competitive advantage in removing them.

However, ING Direct's executive director of savings, Brett Morgan, said the bank was very happy with the response to the Orange Everyday account. "People do care about the monthly fee," he said.

"Our research tells us that the number one reason people move to us is because they don't like fees. The number two reason is that they are unhappy with the quality of the service they are getting elsewhere."

NAB executive general manager, consumer product solutions, John Salamito, said: "We knew that consumers disliked monthly fees as much as the exception fees and we could see a competitive advantage in getting rid of all fees on our transaction account."

Given the success of these products, it is surprising that there aren't more of them. Infochoice has details of only 13 fee-free transaction accounts on its database and several of them come with conditions.

Bankwest, Commonwealth Bank, Newcastle Permanent, St George and Westpac have minimum monthly deposit requirements.

ME Bank and CUA have limits on the number of free transactions per month.

According to Infochoice, only AMP, BOQ, Citibank, HSBC, ING Direct and NAB offer unconditional accounts.