A recent investigation by consumer rights watchdog Which? has revealed that having an unplanned overdraft at the bank is actually more costly in fees and interest than taking out a (much maligned and criticised) payday loan.
According to Which?, unauthorised overdrafts can potentially be “much more costly” when people are borrowing in the short term – up to 12.5% more if the time period is just 24 hours.
Connected to this, January 2015 saw the Financial Conduct Authority (FCA) introduce price caps on payday loans. Interest and fees are now capped at 0.8% per day of the amount borrowed in a payday loan. Someone taking out a £100 payday loan now for 28 days and paying it back on time will now never pay more than £22.40 in fees and related charges. Many payday lenders are notorious for their high interest rates: infamous lender Wonga charges a representative APR of 1,509%, for example.
Banks, however, have no such cap on many of the fees they can charge. In the world of current accounts, if that same individual had borrowed the same amount via a high street bank’s unauthorised overdraft, the resulting fees epic be much higher. The borrower would face a bill of £90 at NatWest and its parent bank, Royal Bank of Scotland (RBS), for comparison. At NatWest and RBS, if a current account customer goes into an unauthorised overdraft by more than £10, they are charged a fee of £6 for each day in they remain in that unauthorised overdraft. This is capped at £90 per “charging period”, which runs from month to month.
These unauthorised overdraft charging structures vary from bank to bank, resulting in a wide variation in the amounts charged when current account customers go into the red without permission. At Barclays, the resulting charges would be £29.75, with charges of £67 at Santander, according to the Which? study. Competitors Lloyds, HSBC and TSB would each charge £80 for unauthorised overdrafts. Which? also noted that these charges could be even higher if any interest payments or possible unpaid item fees were included. The charges could also rise if the money was borrowed over two consecutive monthly charging periods; the maximum charge discovered related to the charging period, and not on how long the money was borrowed for.
The Which? study came to the conclusion that, using the example of borrowing £100 for just one day, the charges imposed by some major high street banks were up to 12.5% higher than the amounts that payday lenders are allowed to charge for the same. As a comparison, the Financial Conduct Authority cap for a payday lender for one day would be 80p, with Lloyds charging £10 under the terms of their Classic Account.
Releasing their findings, a Which? spokeswoman said the consumer rights company was now calling for fess and charges on unauthorised overdraft to be set to the same level as authorised overdraft charges. Further, Which? is calling for the FCA to review bank overdraft charges and fees in the context of other forms of borrowing and credit. The spokeswoman said that the findings showed that financial regulators needed to crack down urgently on such “punitive” unauthorised overdraft charges, that were ultimately causing great harm to vulnerable customers. In a statement, Which? Director of Policy & Campaigns Alex Neill said that those people “with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies. The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”
In response to the Which? report, the larger banks have sought to counter the allegations. RBS’s response to the Which? study was that the bank encouraged all its customers to get in touch if they were going to be having an unarranged overdraft, regardless of amount borrowed or the length of time. RBS felt that an unarranged overdraft “is an expensive method of borrowing, and there could be a number of alternative solutions, such as putting an arranged overdraft in place, and the costs are considerably less. Our Act Now Alert service would alert the customer to being in unarranged borrowing and that they should take action.” The response of Lloyds was that “the vast majority” of its customers who utilised an overdraft facility remained within their planned limit in any average month.
Payday lenders have been greatly criticised in recent years for their excessive interest rates, fees and charges, and for the public perception and image that they did little for those who are financially vulnerable. The reality is that seemingly the big banks were doing the same – just in a different, and disguised, fashion.