Could this be the end of free banking?

Banks could be changing the way in which accounts operate, as high street banks have been put under pressure in the way they issue charges to customers for breaking terms, such as exceeding agreed overdrafts. This will mean that they will have to explore new avenues for raising revenue, which is likely to lead to the end of free banking.

Paid accounts, mortgages and overdrafts would be affected by the changes, as reliance on the significant charges issued to customers would be reduced.

A ground-breaking court case has been under way over these charges for quite some time in which a number of banks are involved. The Supreme Court is expected to rule on whether the Office of Fair Trading can assess their fairness within the next few weeks.

But despite the outcome of the case, banks are taking action in order to prepare themselves for surviving without this lucrative income stream.

Richard Kibble, a partner at PwC, said:"Current accounts seem to be heading towards a very different structure,"

"Banks are getting ready for that. They are looking at the options in a new market where there won't necessarily be free banking."

If banks lose the case, their profits will be substantially reduced while margins are being squeezed due to low interest rates and the need to offer high savings rates on accounts to attract deposits.

Banks could still effectively lose out even if they win the court case, as the government is likely to put pressure on them to reduce unauthorised overdraft fees.

"Whatever the outcome of the case, the banking industry will change as we know it," says a Which4U analyst.

One of the first high-street banks to react to the on-going case was the 70% government owned RBS, after it cut the fee applied to customers who exceed their overdraft limit in half, from £30 to £15.

"If you look at the moves already made, that is a pretty strong signal of where charges will end up," says Mr Kibble.

British banking is unique in the way that customers can currently bank for free. The rest of Europe and indeed the world are accustomed to account keeping fees. But this may be about to change.

There are a number of ways in which banks could substitute this revenue lost through reduced fees. However, the most likely actions include looking towards monthly account keeping fees for basic services, including overdraft facilities, debit cards and even cheque books. Another option could be to take the "pay-as-you-go" approach, whereby charges would be applied for transactions and cash withdrawals.

This will mean that banks will face a big challenge in order to persuade customers who are used to paying nothing for an account to accept paid-for accounts.

We may find that in the initial stages, banks show a reluctancy to lead the pack into the realms of paid-for accounts, as this could significantly damage their customer base. For this reason it is likely that banks will offer something to attract customers, such as introductory deals with no charges for a fixed period.