Banks’ rip-off overdraft fees still worse than a payday loan, warns Which?

Which? first raised the alarm over these fees in 2016 and is concerned that despite scrutiny from the regulator not enough has been done to protect consumers from these sky-high fees.

And now, along with 84 MPs from all the main parties, Which? says it is demanding the Financial Conduct Authority takes urgent action to end this unfair practice by restricting unarranged overdraft charges to the same level as arranged overdrafts.

The consumer champion compared the cost of borrowing £100 for 30 days in an unarranged overdraft across 16 high-street banks with borrowing the same amount for the same length of time through a payday loan.

The FCA previously capped payday loan charges, meaning that the cost of a loan in our scenario would be £24. Which? found:

These fees are particularly costly because bank charges apply to their monthly billing period, not the number of days the money is borrowed for, meaning customers can effectively be charged more for going across two charging periods.

The Competition and Markets Authority set out to tackle the issue by introducing a monthly maximum charge for unarranged overdrafts in August last year - but the measure has clearly failed to stop banks from charging sky-high rates. Meanwhile, the FCA has previously pledged to tackle the problem, but has delayed consulting on much-needed interventions, leaving people still facing these exorbitant fees.

Since Which? first called for banks to lower their unarranged overdraft fees, the Lloyds Banking Group has acted on its calls and scrapped unarranged overdraft fees, meaning it now has the lowest charges of investigated banks - £19.80 cheaper than a payday loan at just £4.20.

Meanwhile, Santander has also committed to Which?’s calls and will remove fees on unarranged overdrafts for its paid current accounts from July this year – although this will not apply to other Santander accounts. Which? and parliamentarians are now calling for other banks to urgently follow suit.

Gareth Shaw, Which? Money Expert, said: “It’s alarming that the majority of banks are still allowed to charge more than payday loan firms through these rip-off overdraft fees. These extortionate fees can cost thousands of pounds a year, hitting those who can afford it the least.

“The regulator cannot drag its heels any longer. We must see urgent action to restrict these charges, bringing them into line with arranged overdraft fees to finally end this unfair practice.”

An RBS spokesman said: “Pay-day loans are an arranged form of lending and are not directly comparable to unarranged overdraft costs.

“We encourage customers to consider arranged borrowing where the costs are considerably less – in this scenario they would be less than £14. Customers receive an alert before they reach unarranged borrowing and over 30 days would receive two further reminders to speak to us about arranged borrowing or to switch unarranged borrowing off.”