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Overdraft fees and charges make up a third of all the income that banks make from providing personal current accounts, new research has shown.

A review into banking by the Financial Conduct Authority (FCA), the City watchdog, has found that around 40% of the value that major banks obtain from current accounts is by using customers’ credit balances as a funding source, followed by overdraft fees and charges, which account for 30%.

The FCA said this proved that there was “no such thing as free banking” when it came to current accounts.

The FCA highlighted overdrafts as a “significant” source of income for the major banks, with around 10% of customers paying half of all charges on current accounts in overdraft fees.

Unarranged overdrafts were a big part of this, particularly among vulnerable customers, the FCA said, announcing that it was planning to make banks change the way they charge for unauthorised overdrafts.

Now read: Are you overpaying for your overdraft?

The review also suggested that banks might find it more difficult to assess risk in the future as they lose control over data from their customers, due to the arrival of open banking. There could also be more consolidation among the banks, which may reduce competition for customers.

The FCA is currently conducting a wide-ranging investigation into personal banking and said foreign exchange services were another profitable area for banks and a potential area of overcharging.

The progress report revealed that the nine major highstreet banks also have control over 80% of all personal current accounts, giving them “considerable competitive advantages”.

“Major banks appear to earn high margins on overdrafts in comparison to other credit products,” said Andrew Bailey, chief executive of the FCA. An additional source of income was products which were cross-sold to customers, such as credit cards.

“Many people go to their Personal Current Account provider when taking out lending products,” the FCA said, noting that 52% of customers with credit cards had one with their current account provider, 48% had a personal loan and 32% had a mortgage.

Mortgages remained the largest contributor to major banks’ lending balances and gross income, the report said. While only 14% of people had a mortgage at the standard variable rate, major banks made 30% of their mortgage net interest income from these customers.

The report paints a picture of a financial services industry where customers do not switch accounts and yet might find better deals if they were to shop around.

The FCA’s Bailey said: “This is an important piece of work to help us understand the complexities of the retail banking market and how this may develop in the future. It provides more evidence that there is no such thing as free banking.”

The FCA’s analysis shows some of the reasons why retail banking markets remain highly concentrated. Major banks have a captive audience of customers who do not switch and can be cross-sold other products. Together they have a large share of the PCA market, currently over 80%, giving them considerable competitive advantages.

The FCA has collected information from 45 firms across the range of the market to inform its ongoing review of the UK’s retail banking business, including major banks, small retail banks, building societies, specialist lenders and new digital banks. The FCA is now seeking responses to its findings so far, and will issue more guidance – and possibly new regulations – later this year.

Now read about the FCA’s plans to cap overdraft charges, or how to reduce your overdraft payments