To fee or not to fee?

So you’re spending away during the course of an average month, not necessarily paying attention to how much and how fast in this increasingly cashless world. Next thing you know your bank sends you a text to say you’ve gone into your unauthorised overdraft and you’ve been charged a fee.

Seriously?!

Firstly, why did they not tell me I was getting close to this happening? Secondly, why am I able to go into unauthorised overdraft at all? In this day and age, surely my set limit should be my set limit? And finally, having had my current account with the same bank for the last 16 years, and mostly been in credit, as well as holding a couple of separate savings accounts with them, why do they not recognise this in the rare instance I go overdrawn?

This week’s final Competition and Markets Authority (CMA) report into both the personal and business current account markets focused on ensuring that existing banks make changes in order to  increase customer understanding of, and limiting customer exposure to, unnecessary fees and charges, particularly in relation to overdrafts.

Whether you agree with it or not, people needing to borrow money is a reality in the UK. The CMA report stated that 45% of the population use an overdraft at some point in any given month. Unfortunately this has become a massive opportunity for banks to earn a significant margin from customers in the form of a quagmire of opaque charging structures.

Now I am in no way saying that banks shouldn’t be able to make money. Like any other commercial enterprise, banks, of which we are one, need to cover their costs and make a decent enough profit to satisfy shareholders. But when that profit is generated by purposefully over-complicating fees and charges, resulting in, at best a lack of transparency, at worst genuine confusion amongst the most vulnerable customers, then it feels exploitative.

The CMA’s solution to this problem was to mandate that the banks implement three key changes: (Read here the summary report on all recommendations):

Customers need to be given clear notice when they are going into overdraft. We will therefore require banks to alert their customers, for example by sending a text message, when they are going into unarranged overdraft. DEADLINE FOR ALL CURRENT ACCOUNT PROVIDERS TO IMPLEMENT BY Q1 2018

• Customers need to be given the opportunity to avoid incurring charges. The alerts that banks will be required to provide will also inform customers of a ‘grace period’ during which they have an opportunity to avoid charges. MANDATORY DEADLINE FOR ALL CURRENT ACCOUNT PROVIDERS TO IMPLEMENT BY Q1 2018

As I said, some banks already provide text alerts to customers, and to be fair, some (not mine!) do even give you a grace period to move money over into your account to prevent the charge.

But these are often only for unauthorised overdrafts, and the alerts happen on the day of the event.

At Starling, we’ll send real-time alerts to notify you when an expected payment has occurred or when you’re going into your authorised overdraft. This is important, as in almost all instances, other banks levy a cost on a customer in the form of either a charge or debit interest or both, for both authorised and unauthorised overdrafts. But more on this in a second.

One of the more compelling points of difference with a Starling account will be that as you build up transaction history with your account, we will also be able to help you forecast your spending, and if something unusual happens, or you run ahead of your usual monthly velocity, then we’ll notify you well before you go overdrawn so you can do something about it.

• Banks will be required to set a ceiling on their unarranged overdraft charges, in the form of a monthly maximum charge (MMC). A bank’s MMC will specify a maximum amount that the bank can charge a customer during any given month, taking together all unarranged overdraft charges including debit interest and unpaid items fees that the bank charges. Banks will be required to disclose the MMC associated with each of their accounts, so that customers are fully aware and can use it to compare providers. MANDATORY DEADLINE FOR ALL CURRENT ACCOUNT PROVIDERS TO IMPLEMENT BY Q3 2017

This measure insists that customers should be able to draw an “apples with apples” comparison between banks so they can see what they will have to pay if they go into their unauthorised overdraft. Whilst we welcome this as another positive move for the industry to give customers a fairer approach, here at Starling we feel quite strongly that “fairer” isn’t necessarily “fairest”.

As flagged above, this measure still only applies to unauthorised overdraft charges, and doesn’t account for the fact that many customers still have absolutely no idea what they pay on their authorised overdrafts.

If you’re not an overdraft user yourself, here are some facts to help frame the debate, and how Starling will compare:

These were pretty confronting numbers when we did our first competitive review last year, and despite all of the regulatory focus on this issue, those numbers really haven’t changed at all since. One concern for when the CMA changes come into effect  is how the banks will then try to make this margin back, increasing costs for arranged overdrafts perhaps, or in other ways? Eek!

Comparatively, Starling are determined to have a transparent and fair approach to overdraft pricing.

We had a lot of debate about charging debit interest versus other options, as interest rates are not always understood either. But it is by far and away the fairest method – that the absolute amount you pay increases in line with the absolute amount you need to borrow. Whereas in monthly fee structures, the people who only borrow a little are subsidising those who borrow a lot.

It’s also important that as a responsible lender, you don’t just stop at transparency of interest rate, but help customers understand what this means in reality. We’re doing a lot of work on our information design to present any interest payable as real money examples – so using an overdraft up to £X at Y% for so many days means that you pay £Z per month.

You can hopefully tell from this piece that we are pretty passionate about this subject at Starling.  Transparency, fairness and talking straight are principles that guide everything we do – from how we work internally as a team, through to our product and app design, and how we communicate with customers.

If, like us, you think it’s time for a different kind of bank, then make sure you sign up to be amongst the first able to open an account when we launch.