New research by Consumers’ Association brand Which has revealed that the most expensive overdraft fees cost seven times as much as a payday loan. Which says it first raised the alarm over these fees in 2016 and is concerned that, despite scrutiny from the regulator, not enough has been done to protect consumers from these sky-high fees. Borrowing from your bank can cost seven times more than from a short-term lender.

In a letter addressed to the FCA signed by 84 MPs, Which is demanding that the financial regulator, the FCA takes urgent action to end this unfair practice by restricting unarranged overdraft charges to the same level as arranged overdrafts.

The research compared the cost of borrowing £100 for 30 days in an unarranged overdraft – borrowing beyond your overdraft limit – across 16 high-street banks with borrowing the same amount for the same length of time through a payday loan. Overall, 13 of the banks investigated charged more than a payday loan company, and considerably more so in several cases.

In 2014, the FCA capped payday loan charges, meaning that the cost of a loan in our scenario would be £24. The Which research found that:

  • Santander’s fees were almost 7.5 times higher and £155 more expensive – its customers were charged a massive £179 over 30 days.
  • TSB is over 6.5 times more costly, charging £160.00.
  • This is followed by HSBC and First Direct – over six times higher, at £150. RBS and Natwest are £144 and six times higher.
  • Meanwhile, Smile, Co-operative Bank, Yorkshire Bank and Clydesdale Bank are all five times more expensive, charging £120.

Which reviewed the unplanned overdraft charges levied by the named banks in April 2018 on fee-free accounts with no minimum monthly payment. It was 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 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.

Unarranged overdraft fees are particularly costly because bank charges apply to your monthly billing period, not the number of days the money is borrowed for. This means you can effectively be charged more for going across two charging periods. In 2016, Competition and Markets Authority set out to tackle the issue by introducing a monthly maximum charge for unarranged overdrafts in August last year – but the measure has clearly failed to stop banks from charging sky-high rates.

Which says, the FCA, has previously pledged to tackle the problem, has delayed consultations on much-needed interventions, leaving people still facing these exorbitant fees. Last year, it found that one in four people used unarranged overdrafts for more than four months in 2016, while almost one in 10 used them for 10 months or more. And the FCA found that in one bank, less than 5% of consumers pay over £250 per year in unarranged overdraft charges, which accounts for up to 60% of the revenue the bank generates from overdraft fees. At another, the FCA said that ’85-90% of unarranged charges are paid by 10-15% of consumers and less than 5% of consumers account for 60% of charges.’ Since Which? first called for banks to lower their unarranged overdraft fees,

Lloyds Banking Group has acted to scrap unarranged overdraft fees, meaning it now has the lowest charges of all investigated banks – £19.80 cheaper than a payday loan at just £4.20. Meanwhile, Santander has also committed to Which’s calls and will remove fees on unarranged overdrafts for its paid current accounts from July this year – although this will not apply to other Santander accounts. Which and parliamentarians are now calling for other banks to urgently follow suit.

Commenting on overdrafts research, Peter Tutton, Head of Policy at StepChange Debt Charity, said “Overdrafts are the second most common type of debt our charity deals with, leaving many at risk of falling into persistent problem debt by entering a cycle of using their overdraft from month to month. They are meant to be short-term, but our evidence shows that they can all too easily trap in expensive and long-term cycles of persistent debt.”

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. Banks which have not yet done so should follow suit, while the FCA should investigate unaffordable lending in the overdraft market as part of its upcoming consultation on high-cost credit and overdrafts.”