Overdraft charges could cost £156 more than payday loans

Which? is calling for the regulator to act on unarranged overdraft fees after new research finds charges from big high street banks could cost up to 180% of the amount borrowed.

Which? research finds that consumers needing as little as £100 could be charged up to £156 more by some major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.

We compared the cost of borrowing £100 for 30 days and found that unarranged overdraft charges at some high street banks were as much as 7.5 times higher than the maximum charge of £24 on a payday loan. Because bank overdraft charges apply to their monthly billing period, not the number of days the money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow across two billing periods.

During its review of the retail banking market, the Competition Markets Authority (CMA) found that over half (51%) of overdraft users went into an unarranged overdraft at some point. However, attempts by the CMA to curb unarranged overdraft charges are not going to tackle these exorbitant fees.

Which? is calling on the FCA to use its High-Cost Short-Term Credit Review to crack down on punitive unarranged overdraft charges. Banks, which set their own monthly maximum charges for overdraft borrowing, should not be able to charge more for unarranged overdrafts than they do for arranged overdrafts.

Vickie Sheriff, Which? Director of Campaigns and Communications, said:

“It’s not right that people with a financial shortfall can be charged so much more by the big high street banks than they would by a payday loan company – especially if the money is borrowed over two monthly charging periods. If banks can continue to set their own charges, then consumers will continue to be hit by exorbitant fees.

“The Financial Conduct Authority must use its current review to cap these high charges and ensure consumers cannot be charged more for unarranged overdrafts than arranged overdrafts.”


Notes to Editors

  1. Research: We reviewed the unplanned overdraft charges levied by the named banks in January 2017, on fee-free accounts with no minimum monthly payment. We assumed the customer had already used up a £1,000 planned overdraft facility, and included all additional daily or monthly charges that applied as a result of the the emergency borrowing. We did not include charges for the planned overdraft, interest, or charges that relate to specific account usage, such as paid or unpaid item charges.

  2. We looked at the following accounts: Barclays Bank Account, Halifax Reward Current Account, HSBC Bank Account, Lloyds Classic Account, NatWest Select Account, Santander Everyday Current Account and TSB Classic Account. The research found that the extra costs of borrowing £100 were:

  1. The research shows the cost of borrowing within a single bank monthly charging period and across two bank charging periods with 15 days spent overdrawn in each charging period.

  2. The CMA has set out several remedies targeted at overdrafts. One of these is to require personal current account providers to introduce a monthly maximum charge (MMC) covering all unarranged overdraft charges (including debit interest). Disclosure of the MMC should be no less prominent than other overdraft charges, but the level of the MMC will be set by each PCA provider and may be different for each of its PCAs. The monthly maximum charge will also apply per bank charging period, not for a 30 day period.

  3. Barclays response: “Significant changes to our overdraft structure and charges were implemented in June 2014. We introduced new text alerts, grace periods and buffer zones to help customers manage their finances and avoid fees.” Barclays does not provide unarranged overdrafts. Any emergency borrowing must be pre-agreed.

  4. Halifax response: “Unplanned overdrafts are designed for occasional spend and the vast majority of our customers do not use them.  We help by promoting several tools to make it easy for customers to stay on top of their finances and avoid using unplanned overdrafts. The process is quick and simple to revise overdraft limits and we also have an interest and fee-free buffer in place.”

  1. HSBC response: “Where customers contact HSBC to arrange or extend and then use their overdraft they would be charged debit interest only. For the current account the majority of our customers use, the total charge for a debt of £100 for 28 days would be £1.40.”

  2. Lloyds response: “Unplanned overdrafts are designed for occasional spend rather than long-term borrowing, and being in an unplanned position for a sustained period of time is not representative of typical current account behaviour. We have a variety of tools in place to help our customers manage their finances and avoid using unplanned overdrafts.  Customers can use our free mobile banking apps as well as voluntary text alerts, and all our overdraft products include an interest and fee-free buffer.”

  3. NatWest response: “We encourage all of our customers to contact us if they are going to enter unarranged overdraft regardless of the amount or the length of time. We offer a number of alternative solutions, such as putting an arranged overdraft in place, where the costs are considerably less. Customers are not charged if their unarranged borrowing is £10 or less and our Act Now Alert Service alerts the customer of upcoming unarranged borrowing to allow them time to transfer money to avoid Unarranged overdraft fees.”

  4. Santander response: “We stress to customers that if they feel they may need to go into an unarranged position that they contact us to discuss their situation so that we can understand how we can help. We have a range of tools to help customers manage their money and keep track of their balance including text alerts.”

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