Internet and telephone bank first direct has said it is to scrap interest payments on its current accounts in response to apathy from customers over the issue.

Chris Pilling, chief executive of first direct, said 96% of its customers think credit interest is not an important factor in choosing the bank, and almost 70% do not know the rate of interest on their current account.

But the bank is promising to "reinvest every penny" saved in order to give customers a better deal on overdrafts and savings.

Mr Pilling said: "We figured it made far more sense to use every single penny we currently pay in credit interest to give customers the chance to earn serious interest on higher interest savings accounts.

"We're also addressing concerns about overdrafts. From November, every first direct customer will get an interest-free overdraft up to £250. And we're scrapping the £2.50 monthly fee for personal text message alerts, which means that no-one need slip into the red by accident, thanks to our red alert texts."

The group said interest on overdrafts will be charged at 12.9% for both authorised and unauthorised borrowing from November 1.

Overdraft arrangement fees of £25 will also be waived if it is the first overdraft request made in six months or if funds are paid into the account to cover an unauthorised overdraft by the end of the same day.

First direct offers two current accounts, its cheque account, which pays interest on credit balances of 0.1%, and its bank account, which pays interest of 2%.

These two accounts will be merged into one account, known as the 1st account, from November 1.

In exchange for giving up interest on their credit balances, customers will have access to an instant access savings account paying 5.5% and a new regular savings account paying 8%, as long as people pay in between £25 and £300 a month.

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