Online banks fight for their share

The battle of the internet banks is gathering pace with Cahoot making headline grabbing offers just days after Intelligent Finance went live.

The Abbey National offshoot has increased its current account interest rate to a maximum of 7.1% on non-chequebook accounts with balances over ?5,001. Chequebook accounts will get 5% on balances up to ?5,000, rising to 6.4% on balances of ?25,001 or more. And on October 16 the bank will start offering 5% cashback on credit card balance transfers.

Intelligent Finance, a subsidiary of the Halifax, offers a 5% rate to its current account customers, but said it will not be increasing its interest rate and is confident that its offers of 0% on credit cards and mortgages will give it the edge over its rivals.

Smile, the internet bank which, arguably, started the current account rate competition when it launched with a 4% rate last October, said it will not increase rates as much as Cahoot's. Its rate has increased to 4.85% over the past year, in line with base Bank of England base rates, but Smile said further increases would eat into the product's profits. "We have a policy of passing base rate increases on to our customers, but, unlike Cahoot, will never go above base rates," a spokesperson for the company said. "Its 7.1% offering seems like a license to lose money to us." Egg, the only internet bank still to launch its current account, may follow Cahoot's suit. A spokesperson for the company said its current account will be launched in a very competitive position but declined to comment further.

Meanwhile, consumer watchdogs have dismissed the banks' wrangling. Stuart Cliffe at the National Association of Bank and Insurance Customers said: "I think it's great the banks are offering attractively priced products, I just wonder how many people will be able to take advantage of them. These banks cherry pick their customers with a vengeance and people who, in the past, would have been good credit risks find they are being turned down for accounts."

"Its also important to point out that these sorts of rates are not that amazing when you consider the enormous savings the banks make by operating on the internet. They offer these rates by cutting down on things like face-to-face customer support, but I don't think that's what people want. They like and need good customer service."