Banks have been given extra time to reform overdrafts. But when the changes begin next April they will be huge. One change is to begin at once – in fact, it should have been done when new rules were introduced in January last year.
The cost of “bouncing” a payment must reflect the actual cost to the bank of refusing it. Many banks still charge for “bouncing” – Barclays charges £8 for each day it refuses a payment, Nationwide £5 per payment refused, and both have caps on the monthly cost.
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However, the FCA says in future banks must be sure that they are not making a profit from refusing payments. The main changes will not begin until April 2020.
These will stop banks charging more for an unarranged overdraft than for an arrange done. Currently, for example, some banks charge £1 a day for an arranged overdraft but £5 a day unarranged. That distinction will go.
If a bank lets a customer go overdrawn, the charge must be the same as if they had arranged it first.
Daily charges will also be banned.
Instead the banks will have to treat overdrafts more like short-term loans and just charge interest on the debit balance. Some banks already do that.
In addition, they will have to show the interest cost using the familiar APR percentage, which is the way all loans are priced. You do not even have to understand percentages – just remember that the smaller the APR the cheaper the loan!
Banks will still be allowed to offer different customers different prices.
So they may charge customers they value a low rate and high credit-risk customers a much higher one.
The banks made £2.4 billion from overdraft charges in 2017, almost a third of that from unarranged ones.
Half the costs were paid by about one customer in 67 who goes overdrawn a lot.
The banks should now offer more help to people in persistent debt. There is no indication how – or if – the banks will raise prices to replace the highly profitable overdraft business.
I do not expect them to charge for all current accounts.