London Briefing/Fiona Walsh:The long-awaited court battle over bank penalty charges gets under way in earnest today in a landmark case that could mark the beginning of the end of free banking in Britain.

Such is the interest in the case, and so large is the number of lawyers involved, that the venue for the hearing had to be switched from the cramped Royal Courts of Justice to the International Disputes Resolution Centre on London's Fleet Street.

It is there over the next two weeks or so that the legality of banking charges levied against retail customers who exceed their overdraft limits will be argued out by some of Britain's leading legal brains.

In a joint move between the Office of Fair Trading and the banking industry, the test case has been brought against seven of Britain's biggest banks - Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Clydesdale-Yorkshire Bank and the Royal Bank of Scotland, along with the Nationwide building society.

It marks the culmination of an unprecedented consumer revolt by bank customers, who have already been repaid an estimated £500 million-plus in penalty charges.

The fightback against the banks gathered pace after the consumer watchdog ruled last year that late payment penalties on credit cards, typically around £25, were illegally high. Credit card companies were told to cut charges to a maximum of £12, which threw the spotlight on bank charges.

Fuelled by the internet, which enabled millions of customers to download formal refund letters from newspaper and consumer group websites, customers besieged the banks, demanding repayment of charges going back six years.

Other customers threatened to take their individual cases to court, including one businessman who won a record £35,987 from NatWest. The banks, reluctant to set a precedent, mostly settled out of court, or refunded the charges on demand, although some customers have subsequently had their accounts closed.

The charges were levied on customers for transgressions such as bounced cheques or for letters advising that overdraft limits had been breached, sometimes by as little as a few pounds. Typically £25-£30 a time, the penalties have cost some account-holders several hundred or, in some extreme cases, thousands of pounds.

Consumer groups have long argued that the true administrative cost to the banks was only a fraction of what they charged customers.

Big money is at stake for the banking industry. The OFT, headed by Irishman Dr John Fingleton, estimates that the banks collectively rake in as much as £3.5 billion each year in unauthorised overdraft fees - equivalent to almost £10 million a day. In an effort to clarify the position, both sides agreed to the test case last year, since when outstanding claims against the banks have been put on hold.

While the OFT insists that the charges are unfair, and are thus covered by consumer contract regulations, the nub of the banks' argument is that the charges are there to pay for the service that is provided to customers. Penalty charges slapped on less prudent customers who run into the red without authorisation have long been used by the banks to cross-subsidise accounts of those more careful customers who remain in credit.

Should consumer power win the day, the banks will be left with a multi-million pound bill, as well as the loss of the £10 million a day brought in by the charges.

A decision is some way off, however. With scores of top-ranking corporate lawyers and QCs involved in the high-profile case, and with such big stakes involved for the banking industry, the proceedings in Fleet Street are only the first stage of the legal wrangling. The decision of the judge, Mr Justice Andrew Smith, is expected in April or May. But the losing side, whether it be the banks or the OFT, will almost certainly appeal the decision and, ultimately, the case is expected to end up in the House of Lords and possibly the European courts.

Should the banks fail to persuade the courts of their case, the floodgates for refunds will reopen with a vengeance. But victory for the consumer could ultimately prove double-edged, as there can be little doubt that the banks will seek to recoup the loss in other ways, such as the imposition of charges for current accounts.

One rather surprising winner has already emerged, however. Riding high in the Youtube song charts is the snappily titled I Fought the Lloyds. . .(sung to the tune of Clash classic, I Fought the Law. . .), an impassioned attack on bank charges by the London band Oystar.

The tune can be downloaded for 50p a time on the consumer website, Moneysavingexpert.com, and Oystar should be doing rather nicely from its surprise success. A follow-up number from the band might prove a little trickier, however.

• Fiona Walsh writes for the Guardiannewspaper in London