Fintech should be disrupting exorbitant overdrafts

New rules coming into force in April that have already prompted higher overdraft rates from incumbents and disruptors should present a platform for a new wave of competition from UK fintech firms.

New rules come into force in April that will affect overdrafts in the UK. Banks, both incumbent and disruptor, have responded by hiking their own rates, seemingly in tandem to around 40 per cent in most cases. The UK fintech industry should be leading a charge to shake up this market.

The Financial Conduct Authority (FCA)’s motivation for shaking things up in this market stems from its research that banks are making £2.4bn a year from overdrafts, often unarranged. The FCA argues daily fees for unarranged overdrafts are bad (to be fair they are often exorbitantly high with TSB formerly levying up to £10 per day) and has decided that the best thing to do is ban them. 

Andrew Bailey, the new governor of the Bank of England, and former FCA chief said in a speech last summer that less than 2 per cent of customers are currently paying 50 per cent of unarranged overdraft fees.

This means, following new rules coming into force from April this year, banks will be lumping all their charges into a single and much higher interest rate. Monzo and Starling have both announced changes to their policies which on the face of it appear to amount to a hike. 

The new rules are designed to improve transparency and boost competition. A good thing. But banks across the board have hugely increased rates. A bad thing. 

UK fintech is booming with record investment from venture capital and private equity. It soared 38 per cent in 2019, up from $3.6bn in 2018, hitting a new record of $4.9bn, according to new research from trade body Innovate Finance.

Of the 10 largest fintech deals in Europe in 2019, the vast majority were from UK firms. These included Greensill Capital ($800m, UK), N26 ($470m, Germany), Klarna ($460m, Sweden), WeFox ($235m, Germany) and Checkout.com ($230m, UK). 

Open Banking is also gathering pace, with more and more firms developing APIs with a view to this being a core revenue stream in the coming years.

Some of this money and effort would be well spent trying to help customers stuck in problem debt in the overdrafts.  At present, few digital banks or other fintech firms seem to making this a priority and yet there is already an existing £2.6bn a year market crying out for better options.

Under the new system, some people will be better off - true - but they tend to be those only using overdrafts for a few days, as Money Saving Expert’s Martin Lewis points out. 

“Currently go £20 overdrawn with NatWest for one day, and you pay £6.01, under the new system it'll just be a few pence. However, for those who are constantly stuck in their authorised overdraft by a decent whack, the increase could be huge. Take someone overdrawn by £2,000, their costs more than triple, from around £180/year to £680/year.”

Fintech's original mission and lifeblood is to do things better than incumbents when possible by a combination of nimbleness, clarity and innovation. It is why people rave about their (neo) banks from a UX point of view. 

The broader banking industry slipping towards more expensive credit should be an opportunity for fintech firms to offer a better deal for customers and not for the lines to blur between incumbent and disruptor.