On July 17th Lloyds Bank announced major changes to the way it charges for overdrafts – a massive simplification. The new charging will be introduced in November for 20 million Lloyds, Halifax and Bank of Scotland accounts.
Most customers will gain. This includes three million people in old style basic bank accounts – they are winners in the new system, a group that has been badly treated by Lloyds for the last 18 months.
One in ten people with a Lloyds overdraft will pay more under the new charging, so what should they do? This could be two million accounts.
Overdraft charges – high and complicated
At the moment people are charged multiple fees on a Lloyds overdraft:
- a £6 a month for having an arranged overdraft;
- a £10 a day if you go more than £25 over your overdraft limit (Halifax customers only pay £5);
- a £10 “returned item fee” for every direct debit or standing order that is rejected; and
- 19.89% interest on the balance.
This complex structure makes it hard for someone to know what their overdraft fees are going to be. It also makes it difficult to compare charges across banks.
New charging – simple but not as cheap as it sounds
The current Lloyds overdraft charges will be replaced by a single fee: 1p per day for every £7 of planned overdraft used.
So the £6 monthly fee is going, there will be no fees or charges for unarranged overdrafts and no charge for rejected direct debits or standing orders.
1p per £7 doesn’t sound much, does it… but it is an APR of just over 50%. So it’s still not cheap!
Does this mean that Lloyds are more likely to reject payments that would take you over your overdraft limit? That would be effectively stopping you from having an unauthorised overdraft… Lloyds says these will be considered on a case by case basis and people with a good history of managing their accounts are more likely to have them approved.
Who will gain from the new charging?
Many people will gain from the new single charge. Lloyds has given a couple of examples:
- someone who runs a £1,000 overdraft for ten days and then goes more than £25 over the limit on just two days in future only be charged £14.20, compared with £30.93 at the moment;
- someone who goes only £100 overdrawn for ten days a month at the moment pays £6.38 a month in fees, but getting rid of the £6 a month flat charge is the main reason this drops with the new charging to £1.40.
One large group of winners is the three million people with “old style” basic bank accounts. These don’t have an overdraft facility but they are currently charged the £10 returned fee charge if a payment is stopped because it would have taken them into the red. These charges will be scrapped under the new charges.
But this group can reasonable feel upset. In January 2016, Lloyds, like all the other major UK banks, was told by the Treasury it had to introduce basic bank accounts which were completely free of fees. Lloyds did this by setting up “new style” basic bank accounts. But it left its previous three million account holders in the old style accounts, paying fees when a payment was rejected.
As a group, these basic bank account holders are less well-off and less likely to try to switch bank accounts. I think Lloyds has taken advantage of them by not switching them (or at least encouraging them to switch) to the new style accounts.
Who will be paying more from November?
The losers will be people with large overdraft limits who use them a lot. They will be paying the higher rate of interest on their overdraft and not gain much from losing the flat charges.
Lloyds estimates 1 in 10 people will fall into this category – so possibly two million accounts. It will be writing to these customers and offer them extra support, for example, there could be a review of the options available to them.
One of the other options could be paying off their overdraft with a personal loan. If the interest rate and the term of the loan meant this was affordable, it could be a popular option. Many people feel very trapped by their large overdraft and would welcome a way of getting rid of it. But it will all come down to the amount such a loan will cost.
Changing before the regulator forces them to?
The Financial Conduct Authority has been considering overdrafts – in particular, unarranged overdrafts – as part of their High Cost Credit review, expected to be published in the autumn. This follows a campaign from Which? and other advice agencies arguing that the fees on unauthorised overdrafts are often higher than payday loans.
Lloyds is the first bank to make a move to head off this criticism. Other banks are looking at capping costs for unauthorised overdrafts rather than scrapping them:
- Nationwide announced it would cap overdraft charges at £50 a month from August 1st.
- RBS and NatWest have announced a cap of £80;
- HSBC is capping unauthorised overdraft fees at £80.
There may also be changes in future to other bank charges. At the moments Lloyds, like the other banks, makes a lot of money from its overdraft customers. If this is reduced, it may look to make more money from its other customers.