The charges that customers are liable to pay for unarranged bank overdrafts in the UK is more than the cost incurred if they borrow the same amount from payday lenders, research by consumer group Which? has revealed. The excess in charges is up to 12 times for these overdrafts.
The study showed that the charges for borrowing as little as £100 (€117.23, $129.54) through an unarranged overdraft for 28 days, were as high as £90 in the Royal Bank of Scotland. This was found to be four times higher than the maximum charge of £22.40 a payday lender can charge on the same amount for the same period. HSBC came in second with charges at £80.
The reason for the difference is that payday lenders are regulated such that they do not charge more than 80p per day for £100. The research found that in the absence of such regulations for banks, a Lloyds' Classic Account customer would incur about £10 a day for a £100 overdraft, indicating a 12-time increase in charges. It was further revealed that this difference could extend up to 12.5 times if other elements such as interest payments and unpaid item fees are taken into account.
While the Competition and Markets Authority (CMA) had called for banks in May to cap their unarranged overdraft fees, it had fallen short of imposing an industry-wide cap on high charges. This had thus allowed the banks to set their charges.
Which? has, post their research, called for the Financial Conduct Authority to set the charges for unarranged overdrafts in line with arranged overdraft charges. It is also asking the watchdog to review this in the context of other forms of credit and crackdown on banks that have such high charges.
Alex Neill, director of policy and campaigns at Which? was quoted by the Financial Times as, "The regulator has shown it's prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers."