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There are many different ways in which banks make money from customers. While we’re all familiar with paying interest on loans and overdrafts or a fee for a current account, it’s the hidden charges that most of us consider a rip off. So, for example, the fee you might pay for going over an overdraft limit or unauthorised overdraft interest. These are just some of the less up front methods banks use to extract cash from customers.
In the current culture of increased transparency many banks are now finding themselves in a position where hidden fees and charges need to be reviewed. Various consumer groups, as well as the Competition and Markets Authority have criticised the use of these charges. The Financial Conduct Authority is currently carrying out a review of high cost credit and part of this review is likely to be new measures on unauthorised overdraft fees. The main basis for criticism of these fees is that they don’t reflect the true cost of missing a payment or going over an overdraft limit and so they could be viewed as punitive or excessive.
Lloyds and Halifax have become the first two mainstream banks to do away with fees. From November this year there will no longer be a fee if you go into an unauthorised overdraft on a current account with either of these banks. So, for example, if you’re a Lloyd’s customer and you go into unauthorised overdraft you would currently be charged a £6 fee and pay 19.89% in interest per year. As of November, there will be no fee to pay for slipping over into your overdraft. Most experts believe that it’s about time that these fees were removed – Justin Modray, who is the founder of the advice firm Candid Money, says:
“Banks have profited from hitting customers with complex and often exorbitant overdraft fees for years, so it’s great to see Lloyds scrapping unauthorised charges.”
As usual, when it comes to money, banks don’t really like to lose out. And they could be losing out significantly if they give up the £6 unauthorised overdraft charge. While every bank could respond differently to the pressure to remove this fee, in most cases there is highly likely to be a steep rise in interest to cover any shortfall as a result. In fact, depending on the interest rate, some borrowers could even end up paying more. So, for example, the Lloyds borrower will no longer pay £6 if they end up in unauthorised overdraft but will instead be charged interest of 68.4% on whatever they have borrowed without authorisation. Lloyds has said that this amounts to 1p a day for every £7 borrowed and that the consequences for most of its customers will be either no change in what they are paying – or an improvement.
In one way or another yes they do. HSBC, for example doesn’t charge interest for an unauthorised overdraft but you’ll pay a fee of £5 a day, up to a maximum of £80 a month. RBS and NatWest also have the same monthly limit. New ethical bank Triodos doesn’t charge anything in the way of interest or fees although it does apply a monthly £3 charge to all its current accounts. Plus, if you have a Triodos bank account then you simply can’t go into an unauthorised overdraft – if the cash isn’t available then the payment just won’t go through.
There’s no doubt that more clarity and transparency from the banking industry does significantly help consumers. However, the fact that Lloyds isn’t just removing the fee – but applying triple the previous interest figure too – has raised a few eyebrows about whether getting rid of the fee is a well-intentioned as it seems. Ultimately, the focus of new regulation and bodies such as the Financial Conduct Authority is on creating a personal finance industry in the UK that enables consumers to safely and fairly make use of products, from personal loans through to credit cards. And that doesn’t mean making it free to borrow without authorisation.
The purpose of the changes to these fees will be to ensure that, if consumers do go into overdraft, this won’t create an unmanageable debt burden. However, ultimately, it’s down to all of us to manage personal finances and make the right decisions to avoid going into an unauthorised overdraft, whatever the charges involved.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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