Daniel O’Boyle is Director of risk analytics and decisioning solutions provider Provenir
When consumer group Which? recently revealed that borrowing money on an unarranged overdraft can be more expensive than a payday loan, many were surprised. The incongruity of a payday lender’s offering eclipsing one from a bank in value fuelled arguments for a clampdown on charges levied against customers who go into the red without pre-authorisation. An investigation by the Competition and Markets Authority (CMA), begun in 2014 presented such an opportunity. This month it delivered its report into retail banking.
The CMA put forward a range of measures that it suggests will benefit customers to the tune of £700 million–£1 billion over five years. One such measure is indeed monthly maximum charges for unarranged overdrafts but it stops short of setting any levels itself – the banks will decide those themselves.
In contrast, an enforced cap on the charges that can be applied to payday loans was implemented early last year by the Financial Conduct Authority (FCA). The CMA’s thorough banking review could have redressed the balance when it comes to charges and fees that institutions can apply at the higher risk end of credit.
In the interests of consumers, the CMA outcome has drawn criticism from some quarters, which say that by not imposing a limit it hasn’t gone far enough.
It’s certainly true that unarranged overdraft charges are a significant source of revenue for banks and a much-used service witharound 25 per cent of UK personal and small business current account holders having them. According to the CMA, around £1.2 billion of revenue was generated for banks from unarranged overdrafts in 2014.
Disruption of any kind – be it an increase in uptake of alternative lending options or pressure to cap charging levels – is a threat to this lucrative revenue stream.
The charge for a £100 payday loan over 28 days has been capped at £22.40 since January 2015. Dipping into an unarranged overdraft for the same amount and period can cost up to £90, revealed Which?
People’s perception of payday lenders is one of high interest rates and fees. They’re seen as a prohibitively expensive option and a last resort when no other financing option exists. The FCA introduced the cap on payday loans last year to protect these borrowers.
Arguably the situation with unarranged overdrafts is a little different. Taking out a payday loan is a conscious, planned decision. Whereas many customers go overdrawn during a short-term cash flow situation.
Indeed, according to the CMA,which looked into the circumstances under which unarranged overdrafts are used, they appear to be generally ‘inadvertent’ – around half of users researched didn’t believe they’d slipped into an unarranged overdraft.
Furthermore, other research showed the CMA that a text alerting customers they were in danger of going beyond a limit reduced monthly unarranged overdraft charges incurred by customers by six per cent on average. The impact was much higher for customers signing up to text alerts and using mobile banking – a reduction in charges of 24 per cent on average.
Ultimately, the more information customers have about their finances, the greater the control they have to take action. The digital revolution has created the means by which companies can provide services that give customers choice.
Accordingly, the CMA will require banks to implement automated alerts for customers to help them avoid inadvertently incurring unarranged overdraft charges. In addition, a grace period will apply before charges kick in.
Banks occupy an increasingly rare position in modern consumer society. Customer inertia to move is still quite highwith 60 per cent of customers with the same bank for more than ten years.
More people have bank accounts than go to payday lenders, therefore action to help customers under stress can have a potentially bigger collective impact there.
Banks and payday lenders form part of an industry where regulations support integrity, fair competition and consumer protection. In the case of payday lending, the regulator intervened, will this latest action from the CMA bring about consistency across all high-cost short-term credit in the interests of consumers?
One thing is clear. Customers have more choice. The CMA’s approach recognises that by equipping customers with more information they can exercise this choice, and let market forces do the rest.
The CMA’s headline reform in its report obliges banks to implement ‘Open Banking’ by early 2018. This will enable customers to choose to share their data across banks. This paves the way for single app banking across multiple accounts and also product comparisons with easier switching.
Customers are realising they can shop around for financial services, in the same way they now seek out the best energy deals. Forward-thinking financial institutions recognise this and have strategies in place to be more customer-centric, more responsive to market forces and more adaptable to change.
Customers are more in touch than ever with their finances thanks to the rising popularity of online and mobile banking. Automated alerts prompted by events including transactions and funds dropping to trigger levels give customers control.
Banks now have the opportunity to act on the ethos of the CMA’s measures. Innovative financial service providers and fintech companies are making credit more available to people who don’t necessarily fit the ideal credit score profile. Banks, with their vast and well-established customer bases are in a strong position to get on-board.