The bank will reduce the interest rate on its 123 account, introduce a 39.9% overdraft rate, and cap cashback on direct debits.
Santander is cutting the interest rate on its 123 current account from 1.5% to 1% on balances up to £20,000 from 5 May.
It will also cap cashback paid at £15 a month. The account currently pays 1% on water bills, council tax and on Santander mortgage payments, 2% on gas and electricity and on Santander home insurance, and 3% on phone, broadband, mobile and TV packages. Each category will be capped at £5.
There will be no change to the account fees, which will remain at £5 per month for 123 customers and £1 per month for the Lite Current Account. The range of household bills on which cashback can be earned will also remain the same.
Santander says the changes are being made as a result of the persistently low interest rate environment and the financial impact of regulatory changes in the banking industry.
The Santander 123 account was originally launched with an interest rate of 3%, but was cut to 1.5% in 2016.
The cut means that the account will be less attractive for savers, with the interest earned dropping by around £100 a year for those with the maximum balance of £20,000.
Andrew Hagger, a personal finance expert at Moneycomms, says: “The Santander 123 account was a stand-out deal in its prime and extremely popular, but in the last few years the offering has been gradually watered down and is now a shadow of what it was.
“There is still a little money to be made and even though the rate has been slashed to 1% that’s not a terrible deal in the current climate where the best easy access savings accounts are paying only around 1.35%.
“The cost of new overdraft regulation has seen Santander cap the cashback on direct debits to a maximum of £15 per month, so it's still possible to get a positive return after the £5 monthly fee, but it's nowhere near as attractive.”
Susan Allen, head of retail banking at Santander, says: “While we have had to make some difficult decisions in the current environment, our current account range remains very competitive.
“Our 123 accounts provide a range of benefits that we know our customers value and our goal is to ensure these accounts remain sustainable for the future.”
A number of banks have cut their current account rates in the past year, while savings rates have also been falling.
The drop in rate puts the Santander 123 account well below the top easy-access rate from Gatehouse Bank at 1.40%.
It also falls short of the highest-paying current accounts.
For example, the Nationwide FlexDirect pays 5% interest on balances up to £2,500. This is an introductory 12-month offer, and when it ends the rate drops to just 1%. Agreed overdrafts are free for the first year, but you’ll need to pay in at least £1,000 a month.
The TSB Classic Plus pays 3% interest on balances up to £1,500. You will need to pay in at least £500 a month, register for internet banking, and opt-in for online bank statements and paperless correspondence.
Santander is also scrapping its overdraft fees and introducing a single interest rate of 39.9% from 6 April.
It says that anyone using an arranged overdraft of less than £1,065 will pay less than they do today.
Santander currently charges £1 a day below £2,000, £2 a day on £2,000 to £2,999 and £3 a day on £3,000 and over.
How the changes affect you will depend on the size of your overdraft and how long you are overdrawn for.
If you had an overdraft of £200 for a month, you would pay £31 under the current charges. With the new fees you will pay £2.89.
With an overdraft of £2,500, you currently pay £62 per month. Under the new charge structure, you will be worse off as you will have to pay £72.36.
The bank says that six out of seven customers who use an overdraft will pay less under the new charging structure.
This is happening because of a crackdown on overdraft charges by the Financial Conduct Authority (FCA).
Lenders make more than £2.4 billion from overdrafts a year, with around 30% coming from unarranged overdrafts.
Under radical new plans from the financial watchdog, banks and building societies will no longer be able to charge higher interest rates on unarranged overdrafts than they do on arranged ones from 6 April 2020.
They will also not be allowed to charge fixed fees for overdrafts. Instead, they will have to introduce a simple interest rate. Banks have responded by raising overdraft rates.
Other banks and building societies that have already raised overdraft rates include Nationwide, HSBC, NatWest, RBS and Barclays.
This article was first written by our sister magazine Moneywise.