Recent changes to overdraft fees could drive up the cost of borrowing for some customers
Customers who regularly use their overdrafts will start seeing the impact of the overdraft fee changes, according to new findings from Moneyfacts.
Most high street banks have made changes to their overdraft charges in response to the Financial Conduct Authority’s (FCA’s) ban on fixed overdraft fees.
The regulator also ruled that unarranged overdraft fees cannot be higher than those charged on overdrafts.
While for some customers this will reduce the cost of borrowing through an arranged overdraft, for others it will make borrowing much more expensive.
Rachel Springall, finance expert at Moneyfacts.co.uk, says: “Banking customers who dip into their arranged overdraft facility could well find they are paying double the amount in charges as a result of firms repricing their tariffs to meet the FCA’s fixed fee ban.
“The much-needed overhaul of the charges has been a double-edged sword for some, while Barclays, Halifax, Lloyds, Monzo, Santander and Virgin Money are among those providers that will charge less.
“Meanwhile, Metro Bank has recently announced it will charge customers £6.40 more, hiking its 15.0% rate to 34.0%, even though it did not charge usage fees before and was one of the most competitive tariffs on the market.
“Other challenger banks do not appear to be following suit though, in fact Monzo will charge 19.0% instead of £0.50 per day and save customers £7.80, Starling Bank will keep its 15.0% rate and Virgin Money’s new tariff will save customers £3.34.
“The banishment of the most extortionate fees among the biggest brands could result in an astonishing saving, Barclays Bank Account customers will save over £10 in charges when using their arranged overdraft – but any savings will depend on the provider and current account someone holds."
Challenger banks may rise in popularity
Customers may start to migrate towards challenger banks, who currently offer cheaper overdraft fees than well-established brands.
Springall says: “As some of the most well-known brands are pricing their tariffs between 35.0% and 39.9%, there isn’t too much difference to choose between them for a cost-saving, so we could see an uplift in customers switching to challenger banks that are a cheaper alternative.”
“This then could spur consumers to switch as they will also now be able to compare overdraft tariffs much more easily now that usage fees are banned."
Alternatives for short term borrowing
Overdrafts have long been a popular short term borrowing solution, however, the overdraft fee changes could result in some customers seeking cheaper alternatives.
Springhall adds: “Clearly borrowers will need to think carefully about whether an overdraft will be the most cost-effective method to borrow, as a credit card could well be a cheaper alternative – in fact, some store cards now charge less.”
"The lowest purchase rate on a standard credit card is 9.9% APR, at the moment store cards charge up to 29.9% APR and the average credit card rate on the market is currently 24.8% APR.
“Credit cards can be just as convenient as using a bank account to borrow and they offer additional protection under Section 75 of the Consumer Credit Act.
“It will be interesting to see whether these new charges will be revisited in the coming months or if customers start to see other account perks slashed in light of the shake-up.”
How will overdraft fees change?
Lenders make over £2.4 billion from overdrafts each year, with around 30% coming from unarranged overdrafts, according to financial regulator the FCA. The financial watchdog has unveiled new plans to overhaul the industry.
From 6 April 2020, banks and building societies will no longer be able to charge higher interest rates on unarranged overdrafts than they do on arranged overdrafts.
They will also be banned from charging additional fixed fees. Instead, lenders will have to use a simple interest rate to make overdrafts “simpler, fairer and easier to manage.”
The table below shows the new overdraft fee for each bank:
|Provider||Effective from date||Interest Rate (EAR)||Total cost for £50 over 7 days||Total cost for £500 over 30 days|
|Bank of Scotland||06/04/2020||39.9%||£0.33||£13.99|
|Royal Bank of Scotland||02/04/2020||39.49%||£0.32||£13.87|
|The Co-operative Bank||04/04/2020||35.9%||£0.30||£12.77|
|Clydesdale Bank /||12/12/2019||19.9%||£0.18||£7.52|
*the first £250 of overdrafts will still be free