Most Nationwide banking customers will pay more for going into the red after it became the first major current account provider to respond to a ban on excessive fees.
Nationwide, which has almost 8 million current account holders, said that following a clampdown by the Financial Conduct Authority (FCA), it would be introducing a single overdraft interest rate of 39.9%, and removing many fees. That rate is more than double the 18.9% that the building society now charges holders of its FlexAccount for an authorised overdraft.
The new rate, and the society’s confirmation that two-thirds of its overdraft borrowers are set to pay more, follows warnings that while the shake-up would benefit more vulnerable consumers, it could lead to firms seeking to make up their losses by imposing higher authorised overdraft rates. Other banks are expected to announce higher headline rates over the coming months.
Why are overdrafts being overhauled?
The Financial Conduct Authority said in June 2019 that it was introducing a raft of measures to fix the UK’s “dysfunctional” overdraft market. It said consumers “cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges”. Costs vary dramatically. Unauthorised overdrafts can be hideously expensive: the FCA said the typical cost of going just £100 into the red without permission was £5 a day – which the regulator expects to fall to less than 20p a day as a result of its changes.
What is the solution?
The regulator is simplifying and standardising the way banks charge for overdrafts. For example, it is banning them from charging higher prices for unauthorised overdrafts than for authorised ones. And it will require everyone to price overdrafts using a simple annual interest rate.
Will it work?
The problem is that with one-size-fits-all solutions, there are always winners and losers. PricewaterhouseCoopers recently warned: “The potential loss of income these rules create … could lead to firms seeking to make up their losses through higher arranged overdraft rates, loss of interest-free buffers, additional current account charges or tighter lending criteria.” The FCA has accepted some of this – for example, it said it recognised that “those with heavier use of arranged overdrafts may pay more than at present”. But at the same time, vulnerable consumers – some of whom, said the FCA, were disproportionately hit by excessive charges for going into the red without permission – will almost certainly see their borrowing costs fall.
Nationwide is the first major provider to respond to the FCA’s clampdown announced in June, which the regulator said would “make overdrafts simpler, fairer, and easier to manage”.
The FCA announced it would be stopping banks from charging higher prices for unauthorised overdrafts than for authorised ones, banning fixed daily or monthly charges for borrowing in this way, and requiring banks to price overdrafts using a simple annual interest rate.
The FCA said the current overdraft market was “dysfunctional” and “causing significant consumer harm”. There are 26 million UK overdraft users, and they are a huge cash cow for banks, which made more than £2.4bn from them in one year alone (2017).
Authorised overdraft costs vary hugely and are often baffling – some banks impose daily fees, some charge monthly fees, some charge interest on the amount owed, and some use a combination of these. Unauthorised overdrafts can be punishingly expensive.
While the new rules do not take effect until April 2020, Nationwide said its changes would begin in November 2019. It is bringing in a single overdraft rate of 39.9% across all its adult current accounts, which include FlexDirect, FlexPlus and FlexAccount. At the same time it will scrap all unauthorised borrowing charges, along with paid and unpaid transaction fees.
A spokesperson said: “A third of our overdraft borrowers will pay less or the same.” Of those that will pay more, 75% will pay a maximum of 20p a day more than they currently pay.
The society said: “If you are borrowing £500 for a day, it will cost 46p [in interest]”.
That is almost double the 24p in interest that someone with a FlexAccount borrowing £500 for one day on an arranged basis would pay now. However, based on this scenario, those holding Nationwide’s FlexDirect or FlexPlus account are currently charged 50p a day.
The society is also scrapping the £250 fee-free buffer offered on FlexPlus authorised overdrafts, and said there would be additional text alerts to help members manage their money.
In June the FCA appeared to predict the steps taken by Nationwide, and those likely to be taken by other banks and building societies, when it said its shakeup “could create winners and losers, as firms would be likely to seek to recover lost overdraft revenue from within their overdraft offering by, for example, increasing arranged overdraft prices and reducing interest-free buffers”.
It added that it was particularly concerned about the welfare of vulnerable consumers.
