If you are a current account customer of British banks Lloyds, Halifax or Bank of Scotland, you’d better read this – especially if you go into the red because overdraft fees are changing.
First off, the good news: Lloyds has axed unauthorised overdraft fees.
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So no more daily charges for going over an existing overdraft limit; it also means no more monthly arrangement fees and returned item charges.
In its place comes one standardised charge across the three brands of 1p for every £7 borrowed per day.
It is, according to Lloyds simple and transparent, giving customers more control of their overdraft borrowing and how they manage their finances.
There are inevitably some winners and losers.
Lloyds estimates that about nine in 10 of its customers will either be better off or unaffected financially by the changes.
Typical winners will be customers that exceed their overdraft limit by a small sum for a few days.
Until yesterday, a Lloyds’ customer who exceeding their overdraft limit or going into the red without agreeing an overdraft limit was charged £10 per day. They also paid 19.89 percent interest on the overdrawn balance plus a £6 monthly usage fee for holding an arranged overdraft.
At Halifax, the daily fee was slightly less onerous at £5 per day for unauthorised borrowing.
The new regime harmonising charges across the three Lloyds brands is certainly simpler but nobody is claiming it is cheap.
By Lloyds own admission, the new 1p per day charge for every £7 borrowed still works out at an interest rate of about 52 percent.
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Even after the changes, Lloyds charges for overdrafts will be dearer than those charged by smaller rivals such as Metro Bank, the Post Office and direct bank, HSBC’s first direct.
As for the losers, look no further customers with large overdraft limits who use them for much of the month. Take a customer using all of a £1,000 limit for 10 days a month – the new fees will be about £15 a month against £11 under the old regime.
Another loser will be Lloyds itself. Last year the UK’s Competition and Markets Authority (CMA) estimated that the major banks in the country pocketed about £1.2bn in total from unarranged overdraft fees.
With a market share of 25 percent, Lloyds will drop a nine figure sum due to today’s changes.
Why the change? Three reasons
In addition to Lloyds’ claim that it wants its charges to be clear and simple there are regulatory and competition reasons for the change.
On regulation, the FCA is looking at the cost of short term credit including overdraft. The FCA has said that with half the UK population financially vulnerable, existing overdraft fees are unhelpful.
Last year the CMA stepped back from capping overdraft charges.
With some overdraft fees exceeding rates charged by payday loans –as eloquently argued by campaigners led by Rachel Reeves MP – the FCA may not be as lenient as the CMA.
Lastly, there are competitive reasons for today’s change.
Lloyds is losing market share. Since seven day account switching came in four years ago, Lloyds has been losing more customers than it gains.
Lloyds is also be wary of increased competition from rivals that have entered the current account sector in recent years such as Metro Bank, Marks and Spencer and the Post Office.
Next year, the new breed of startup banks including Starling and Monzo will enter the current account battle ground.
Traditionally, banks have not used overdraft charges as a competitive sector.
Santander has been the big winner arising from seven day switching and its overdraft charges are, if anything, higher than Lloyds.
Barclays ended unauthorised overdraft charges more than two years ago – and has been one of the bigger losers from seven day switching.
Finally, belatedly, news such as Lloyds’ fees changes today may give a boost to the UK’s low bank switching rates.
At present, only about 1m out of the 46m adults with UK current accounts switch their main current account every year – a miserable three percent – against double digit rates for mobile phone and energy supplier switchers.
Today’s move by Lloyds represents a move in the right direction – and now attention turns to how its traditional rivals will respond.