I’ve blogged many times that so called free banking is a fallacy. It's something I have blogged about for a decade, and the recurring theme is free banking should be banned by the regulator as it’s only free as long as you don’t go overdrawn. The result is that the most financially challenged group of customers pay for the wealthy bank users, by being stiffed with high costs and fees. For example, until yesterday, HSBC had been charging unarranged overdraft users £5 a day for the privilege, as well as high interest in their overdraft of 9% to 19% APR.
The UK regulator has finally cracked down on such practices, saying that it is unfair. In the summer, they posted the following:
In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016. People living in deprived areas are more likely to be impacted by these fees. In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.
£2..4 billion a year from fees for those who go overdrawn, of which £1.2 billion is coming from just 1.5% of customers who are the most financially vulnerable.
Thanks to these punitive fees, the rest of us enjoy 'free banking'. The FCA announcement went on to add that it was:
- Stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
- Banning fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.
- Requiring banks and building societies to price overdrafts by a simple annual interest rate.
- Requiring banks and building societies to advertise arranged overdraft prices with an APR to help customers compare them against other products.
- Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments.
- Requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.
The new rules come into force in April 2020. April 6th to be exact.
It should have been April 1st, based upon the way in which banks are implementing the rules. This is because the banks have made it really simple: you go overdrawn, and we will charge you 39.9% interest. Well, only if you are HSBC and Nationwide Building Society, as it stands today.
Money Saving Expert’s banking editor, Helen Saxon, said :“With both of the first banks to announce changes moving overdraft interest rates to around 40%, we have to wonder if this is the new normal.”
Is this the new normal?
No. Bearing in mind that the FCA is trying to make it better for financially challenged customers, I am sure that this is not the result they expected. In fact, it is interesting that HSBC made this announcement just days after it emerged that they have had to repay 115,000 customers £8 million for failing to warn them they might drift into being overdrawn.
Equally, it will make a big opening in the market for competitors to differentiate. For example, after I tweeted this news, it got a lot of responses and shares. I specifically liked this comment from Mark Sugden of The Daily Chain:
And people question if challenger banks will succeed. It's like HSBC are taking a man off the pitch.
— Satoshi Nakameowdough (@Nakameowdough) December 5, 2019
So true. What we will see happening is a new price fracturing war emerge between challengers, incumbents and start-ups. If a banks response to a law that is made to make them treat the customer more fairly ends up with the bank treating them more unfairly, well, it just does not go down well. And to treat the weakest, who are the most challenged, is the worst act of all.
I truly believe that FinTech offers a way to design around rewarding customers for good financial behaviours, rather than seeking to punish those who have bad ones. In fact, the whole reason people hate financial firms, not just banks, is because they give you an umbrella on a sunny day only to ask for it back when it rains. No wonder people hate financial institutions.
Meanwhile, as the tagline of several new banks is about seeking to love your bank, not hate them, this will be an interesting space to watch.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...