Current accounts with a monthly fee could become the norm after the Office of Fair Trading launched an inquiry into whether banking penalty charges were subsidising "free" banking. The formal study will examine issues including the provision of free banking and the implications of moving towards charging customers for having a current account.
The consumer watchdog said customers might benefit from up-front fees if it brought greater transparency. It said a lack of transparency about fees and interest rates made it difficult for consumers to compare accounts effectively, meaning it was difficult to judge whether it was worth switching to a rival bank.
John Fingleton, chief executive of the OFT, said: "This market study will enable us to consider wider questions about transparency and value in the provision of personal accounts.
"This will provide the necessary context for assessing the fairness of unauthorised overdraft and returned item charges before we apply the law in this area.
"Our ultimate objective is a competitive retail banking market in which informed and active consumers drive strong competition and high levels of customer service among banks in the long-term, with minimum regulatory intervention."
The possible end of free banking was signalled by First Direct when it announced in November 2006 that it intended to levy a £10 monthly fee on its current accounts from February 2007. To avoid the fee customers will have to pay in £1,500 a month - requiring an annual salary of at least £24,000 before tax - or maintain an average balance of £1,500.
First Direct claimed at the time that "fewer than two in 10 customers" were likely to incur the fee. First Direct's chief executive, Chris Pilling said the move was aimed at the bank's 40,000 dormant accounts and at those who use the bank for five to 10 transactions a year.
The OFT is to review whether competition would be improved "if there were a shift away from the widespread provision" of free current accounts.
Consumer groups welcomed the investigation, but questioned whether the banks could justify ending free banking when the big five banks alone made profits in excess of £35bn last year. They said delaying a decision on whether to cap bank charges had also left millions of customers to battle in court to reclaim charges.
Banks have come under pressure to cut charges on unauthorised overdrafts. Campaigners allege that millions of customers have been unfairly charged by banks using rules in the small print.
The OFT aims to publish the findings of its study by the end of the year but did not rule out a referral to the Competition Commission should it need to impose tough sanctions on the banks.