FCA intervention on overdraft charging is long overdue

Following today’s FCA announcement that the way the banks operate and charge for overdrafts needs fundamental reform, Andrew Hagger of Moneycomms looks at how some customers with the big banks are paying way over the odds for agreed overdrafts.

An overhaul of bank overdrafts is well overdue – I’m sure the FCA has recognised that some banks are charging the equivalent of sub-prime lending rates to credit worthy customers and that there is a huge and unfair variation in charges between providers.

At one time all you would pay to use an overdraft was be daily interest charge, typically around 15% to 20% EAR – making it simple to compare.

However, in recent years the introduction of fixed monthly or daily fees has seen the cost of authorised overdrafts soar – particularly for smaller sums and for short durations.

The £6 monthly fees charged by TSB, NatWest and RBS are particularly punitive on those who only dip into the red by a small amount for a day or two.

Borrow £500 for 7 days with First Direct and it will cost you 71 pence but with NatWest/RBS and TSB it’s more than ten times that amount (see table below).

The latest Lloyds Bank, Bank of Scotland and Halifax tariffs don’t sound expensive at 1p per day charge for each £7 borrowed but it actually equates to an interest charge of around 52%.

It must be galling for these Lloyds & Halifax customers with an excellent credit rating to know that some sub-prime credit cards are charging less than this (typically 35% – 40% APR).

Banks say daily fees easier to understand – that may be the case but for many people it can also prove to be far more expensive than a standard interest rate tariff without a fee.

The table below not only highlights the worst offenders but also shows that some banks offer a far more reasonable level of charging – using a simple daily interest rate which works out at a fraction of the cost to the borrower.

Bank	Account	Tariff for agreed overdrafts	Cost £500 x 7 days	Equivalent interest rate
NatWest/RBS	Select	£6 monthly fee + 19.89% EAR	£7.75	81%
TSB	Classic	£6 monthly fee + 19.85% EAR (first £25 free)	£7.67	80%
Santander	123	£1 per day up to £2,000	£7.00	73%
Barclays	Bank Account	75p per day up to £1,000	£5.25	55%
Lloyds Bank	Classic	1p per £7 borrowed per day	£4.97	52%
Halifax	Reward	1p per £7 borrowed per day	£4.97	52%
Metro Bank	Current	15% EAR	£1.34	15%
Starling Bank	Current	15% EAR	£1.34	15%
Post Office	Standard Account	14.6% EAR	£1.32	14.6%
M&S Bank	Current	15.9% (First £100 free)	£1.14	15.9%
First Direct	1^st account	15.9% (First £250 free)	£0.71	15.9%
*Research & Calculations – Moneycomms.co.uk 31.05.2018*