CMA REPORT LOOKS TO INTERVENTIONS TO HELP OVERDRAFT USERS
LATEST RESEARCH SHOWS OVERDRAFT CHARGES MORE EXPENSIVE THAN PAYDAY LOANS
The wide-ranging Competition & Markets Authority (CMA) investigation into retail banking was released earlier today. One of its key areas of intervention is aimed at personal overdraft users suffering from “competition failures” in the sector.
Commenting after the release of the CMA report, Alex Letts, CEO of the digital ‘unbank’ Ffrees, said: “In its provisional findings published in June, the CMA made the point that free-if-in-credit accounts are not in fact free.
“I wrote to the CMA1 to explain that banning the use of the word free would be the most productive move they could make, as it grossly distorts the competition playing field and misleads consumers. In some cases overdraft charges can hit more than £80 per month”.
“Now we have found that overdraft charges can in fact be even MORE expensive than payday loans.
“We know this contradicts what people expect, with one of our recent surveys2 showing the majority of Brits (40%) think an overdraft is the cheapest option for unsecured credit, followed by a credit card (33%) and finally a personal loan (24%). In fact it is quite the reverse.”
The research has analysed the cost of borrowing with banks, in both authorised and unauthorised scenarios, and compared this to the cost of borrowing the same amount with payday loan providers.
Comparisons show that the cost of borrowing £100 for a month can cost up to £80.80 more per month if people choose to use an overdraft, rather than a payday loan.
Borrowing £100 for a month using the Halifax Reward Current Account unauthorised overdraft costs £100. A payday loan from The Money Shop costs £19.20; a difference of a staggering £80.80.
The findings even reveal that those using an authorised overdraft pay a higher price than those who choose to take out a payday loan. At present, 22% of current account holders use an unauthorised overdraft, and 55% have an arranged overdraft3.
Halifax and Santander, the two most switched-to current accounts3, have higher costs and interest rates on authorised overdrafts than payday loan providers. Both banks charge £30 if account holders borrow £100 a month, compared to £24 if you take out a payday loan with Wonga.com.
AUTHORISED OVERDRAFTS
Halifax Reward Current Account | The cost of borrowing £100 for a month: £30.00 | The % cost of borrowing £100 for a month: 30% | Per annum fixed rate: 365.00%
Santander 123 Account | The cost of borrowing £100 for a month: £30.00 | The % cost of borrowing £100 for a month: 30% | Per annum fixed rate: 365.00%
UNAUTHORISED OVERDRAFTS
Halifax Reward Current Account | The cost of borrowing £100 for a month: £100.00 | The % cost of borrowing £100 for a month: 100% | Per annum fixed rate: 1200.00%
Santander 123 Account | The cost of borrowing £100 for a month: £95.00 | The % cost of borrowing £100 for a month: 95% | Per annum fixed rate: 1140.00%
Nationwide FlexDirect | The cost of borrowing £100 for a month: £60.00 | The % cost of borrowing £100 for a month: 60% | Per annum fixed rate: 720.00%
NatWest Select Account | The cost of borrowing £100 for a month: £96.00 | The % cost of borrowing £100 for a month: 96% | Per annum fixed rate: 1152.00%
Lloyds Classic Account | The cost of borrowing £100 for a month: £86.00 | The % cost of borrowing £100 for a month: 86% | Per annum fixed rate: 1032.00%
TSB Classic Plus Account | The cost of borrowing £100 for a month: £87.53 | The % cost of borrowing £100 for a month: 87.53% | Per annum fixed rate: 1050.36%
PAYDAY LOANS
Wonga.com | The cost of borrowing £100 for a month: £24.00 | The % cost of borrowing £100 for a month: 24% | Per annum fixed rate: 292.00%
The Money Shop | The cost of borrowing £100 for a month: £19.20 | The % cost of borrowing £100 for a month: 19.2% | Per annum fixed rate: 233.60%
Payday UK | The cost of borrowing £100 for a month: £24.00 | The % cost of borrowing £100 for a month: 24% | Per annum fixed rate: 292.00%
Quickquid | The cost of borrowing £100 for a month: £24.00 | The % cost of borrowing £100 for a month: 24% | Per annum fixed rate: 292.00%
Cash Lady | The cost of borrowing £100 for a month: £24.00 | The % cost of borrowing £100 for a month: 24% | Per annum fixed rate: 292.00%
ENDS
2 Based on an independent survey of 2,014 UK residents, carried out March 2016.
3 CMA: Retail banking market investigation: provisional findings report, Appendix 7, 28 October 2015
4 From BACS own Current Account Switch Service figures
5 http://www.fca.org.uk/news/fca-confirms-price-cap-rules-for-payday-lenders
Notes to editors:
Alex Letts is available for interview opportunities on this topic and others around banking. Ffrees is also able to provide case studies of customers who have turned their backs on overdrafts.
For more information please contact Tom Holdsworth (tom.holdsworth@ffrees.co.uk) or Debbie McAuliffe (debbie.mcauliffe@ffrees.co.uk) on 0114 286 6327.
About Ffrees:
Ffrees Family Finance Ltd was founded in 2011 and launched its current account product in October 2013. It has since attracted over 60,000 customers and is the UK’s first ‘unbank’. Their digital, online-only account is designed for people who are disillusioned with banking and want to have full control of their own finances, with no unexpected fees or overdrafts.