High street Banks’ overdraft charges costing £156 more than payday loans

Charges imposed by big high street banks could cost up to 180 per cent of the amount borrowed, with Royal Bank of Scotland and the Bank of Scotland amongst those hitting customers hardest, according to new research.

Consumer watchdog Which? found that consumers needing as little as £100 could be charged up to £156 more by some major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.

Which? compared the cost of borrowing £100 for 30 days and found that unarranged overdraft charges at some high street banks were as much as 7.5 times higher than the maximum charge of £24 on a payday loan.

Because bank overdraft charges apply to their monthly billing period, not the number of days the money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow across two billing periods.

During its review of the retail banking market, the Competition Markets Authority (CMA) found that over half (51%) of overdraft users went into an unarranged overdraft at some point. However, attempts by the CMA to curb unarranged overdraft charges are not going to tackle these exorbitant fees.

Which? found RBS and NatWest could charge £180 to borrow for 30 days over two billing periods, a difference of £156 compared with a payday loan costing £24.

Customers using Bank of Scotland, Lloyds or Santander could be charged £160 to borrow across two billing periods, £136 more than a £24 payday loan, Which? found.

Banks, which set their own monthly maximum charges for overdraft borrowing, should not be able to charge more for unarranged overdrafts than they do for arranged overdrafts.

The consumer rights champion is calling on the FCA to use its High-Cost Short-Term Credit Review to crack down on punitive unarranged overdraft charges.

Vickie Sheriff, Which? director of campaigns and communications, said: “It’s not right that people with a financial shortfall can be charged so much more by the big high street banks than they would by a payday loan company – especially if the money is borrowed over two monthly charging periods. If banks can continue to set their own charges, then consumers will continue to be hit by exorbitant fees.

“The Financial Conduct Authority must use its current review to cap these high charges and ensure consumers cannot be charged more for unarranged overdrafts than arranged overdrafts.”

Lloyds Banking Group, which owns Bank of Scotland, said: “Unplanned overdrafts are designed for occasional spend rather than long-term borrowing, and being in an unplanned position for a sustained period of time is not representative of typical current account behaviour.

RBS (which includes NatWest) said it encouraged customers to get in touch if they went into the red without pre-authorisation and said the costs of a formal overdraft facility are always ‘considerably less.’