Last updated 05:34, Friday, 06 June 2008

Barclays has announced it is to “significantly reduce” its overdraft fees, in a move that could question industry claims about the “true cost” of bounced payments.

All change: Mark Parsons, managing director of current accounts at Barclays, said: ‘We have listened to our customers and acted on this feedback by completely revamping our unauthorised overdraft service, replacing it with the new personal reserve’

The bank said that from August 18 customers would have to pay only £8 for a returned or guaranteed transaction.

That’s significantly lower than present charges that can be as high as £35, but have been described as fair by current account providers.

Barclays will also replace unauthorised overdrafts with a “personal reserve” which users can access for a charge of £22.

Customers opting out of having the buffer zone will see payments over an agreed limit bounced, but will still only have to pay the reduced £8 charge.

Barclays said it had been able to reduce its charges as a result of breakthroughs in its handling systems, with a far greater automated service.

But it is likely to be seized upon by campaigners who have long claimed that fees of up to £35 are unfair and does not represent the actual cost to banks – which they believe could be as little as £2.50.

In April, the Office of Fair Trading won a High Court ruling over the issue, when a judge said fees were subject to “unfair contract” rules.

It paves the way for a further hearing to decide whether charges are unfair and, if so, what a fair charge should be

Banks have since lodged an appeal over the High Court ruling.

Barclays’ £8 charge could lead to other banks scrambling to play catch up in an industry that faces being forced to lower fees.

It is part of a new overdraft service for customers that will also include the launch of “personal reserves” on August 18.

These buffer zone, typically of around £250, can be used as often as the customer needs without repeat charges.

But if a customer fails to pay off the additional balance within five working days, they will be liable to pay another £22 fee.

According to the bank, the system will “significantly reduce” charges and give customers certainty about when their payments will be met and when they will be bounced.

Crucially, current account users can opt out of having the buffer zone – and therefore not be liable to the £22 charge – but still only face £8 for bouncing a payment.

Mark Parsons, managing director of current accounts at Barclays, said: “We have listened to our customers and acted on this feedback by completely revamping our unauthorised overdraft service, replacing it with the new personal reserve.

“Our customers wanted a simple, clear way of managing payments when they go beyond agreed limits.”

He added: “Our new approach has been tested with consumers extensively over the last two years and we are confident that our products will promote account switching to Barclays.”

The bank also announced that from June 1 it has scrapped credit interest on standard current accounts. Research found that customers do not value the 0.1 per cent payment – which works out about 2p a week to the typical account holder.

And from June 2, interest on overdrafts went up from 15.6 per cent to 17.9 per cent.

Mr Parsons added: “The overall package of changes we are making for new and existing customers provides a simple, clear choice and improved value, marking a step change in current account banking in the UK.”

The bank’s 11 million current account customers will receive a letter in the coming weeks informing them of the changes.