Barclays slashes overdraft fees as banks battle for current account customers

Barclays is cutting the cost of overdraft fees which have been heavily criticised as being unfair by consumer watchdogs.

The penalty will change to £8 for each transaction made while in the red without permission - down from a charge of up to £35 a day.

The system should make it cheaper for the minority of customers who fall into the red.

Critics however say it will be partly funded by removing the interest paid on the credit balance held in the accounts of millions of customers.

The banking industry has previously insisted charges of £25 to £39 are justified where someone breaks their overdraft limit or bounces a cheque.

The regime being introduced by Barclays from August, however, suggests banks can run accounts without relying on £3.5billion raised each year from the current range of charges.

Unauthorised overdrafts will also be replaced with a 'Personal Reserve', which users can access for £22 per week. The consumer group Which? said the move is a step in the right direction, but its chief executive, Peter Vicary-Smith, added: 'It would have addressed a lot of customers' problems if this had happened years ago.'

The decision to remove interest on current accounts will be controversial. However, the current rate of 0.1 per cent is so low it is of little value. The bank will pay credit interest of three per cent on some accounts which carry a fee of £3 a month - £36 a year.

Marc Gander, of the Consumer Action Group, said the cut in overdraft fees vindicates its stance that the penalties have been 'wildly excessive'.

The Office of Fair Trading has won a High Court ruling which gives it the right to rule that the current system of overdraft charges is unfair. Banks are appealing against the decision.

Barclays said its new system is based on feedback from customers. Mark Parsons, managing director of current accounts, said: 'They wanted a simple, clear way of managing payments when they go beyond agreed limits.'