Tesco Bank has pledged to scrap a £5 monthly fee charged to its current account customers, ramping up competition in the market.
Tesco's announcement comes hot on the heels of Santander's confirmation of plans to increase charges on its popular 123 current account.
Tesco is a relatively new challenger, having launched its first current account just over a year ago with a promise to shake up the sector.
Currently, Tesco Bank customers pay a £5 monthly fee if they deposit less than £750 a month, but from September 17 this will be removed.
The change means anyone with a Tesco Bank current account will earn 3% interest on credit balances up to £3,000, without having to pay a monthly fee.
Customers who currently pay the fee could be £60 a year better off. Tesco has not disclosed how many customers pay the £5 fee.
David McCreadie, managing director of banking at Tesco Bank, said it had been "delighted" with the response from customers since launching its current account last year.
Santander's innovative 123 account, which has won acclaim and had people flocking to it in recent years, pays up to 3% interest on balances of up to £20,000, but the group confirmed this week that from January the annual cost will shoot up from £24 to £60.
Santander, whose move was described as a "kick in the teeth" for customers by some commentators, said it was forced to make the changes as a result of the rising cost of banking in the UK.
Tesco Bank's announcement comes ahead of the two-year anniversary of an industry drive to make it easier for people to ditch their old current account provider and switch to a new one.
The switching service, introduced on September 16 2013, means accounts can be swapped over in seven working days, rather than between 18 and 30 days previously. Tesco Bank is part of the current account switching service.
Charlotte Nelson, a spokeswoman for financial website Moneyfacts.co.uk, said: "It is great news that Tesco Bank is removing its fee for all of its current account customers and, with this offering already sitting within the Moneyfacts best buys, it makes this deal even more competitive.
"With constant talk about the end of free banking likely, this is goes to show that customers can still currently get a great deal if they are looking to switch their current account."
Ms Nelson continued: "With the switching guarantee scheme firmly in place customers no longer have to put up with high charges or service."
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