Overdrafts have been a product provided by banks for years, and for most people they serve a very functional and useful purpose. You can borrow a little bit of money without paying through the roof on interest and fees. On the flipside, however, is unarranged overdrafts.

Unarranged Overdrafts

Unarranged overdrafts act in a similar way to overdrafts, however they fail to provide low interest rates and can end up costing consumers hundreds of pounds. Part of the controversy over these unarranged overdrafts is the consumer that the high fees target. Usually, overdrafts are offered to those with a good credit history, meaning people with bad credit are prohibited access to this product. Instead, they are forced into unarranged overdrafts if they withdraw more than their available balance, and as it stands today, these fees can often cost far more than other forms of borrowing, sometimes even as much as 10 times the fees of a payday loan.

Overdraft fees are a huge income for banks, bringing in around £2.4 billion in 2017. Unfortunately, once dissected, this figure is shown to be disproportionately generated by a small group of consumers in the overdraft market. 50% of the fees made from unarranged overdrafts came from just 1.5% of customers. This means a very small proportion of the bank’s customer base is responsible for a very large amount of the fees generated. Often, those hardest hit with overdraft fees are the most vulnerable.

FCA Regulation

The Financial Conduct Authority (FCA) has confirmed that they will introduce a reform to the current overdraft market, including unarranged overdrafts, focusing on reducing the cost and protecting the customer.

In 2014, the FCA took over the regulation of high cost short term credit and the new rules and regulations they introduced have so far proved successful in ensuring a better customer outcome when borrowing from direct short term lenders.

This hopefully indicates that the new regulations for the overdraft market will also result in a better outcome for the customer, including customers who are considered vulnerable.

Reforming Overdrafts

The reform aims to make borrowing through overdrafts cheaper and more sustainable for the consumer. Although this may seem like a simple premise, the implementation is much more complex and takes time to initiate. The FCA aims to have these new regulations introduced by 6th April 2020, so it’s only a few months before the changes will be exercised.

It might be a good time to start practising any saving techniques you’ve been thinking of starting, so even if you do fall into a sudden financial emergency, you’ll have some funds to cover it while unarranged overdraft fees are still high. 

You can find out more about the Financial Conduct Authority’s ideas for the overdraft market reform on their website.

Benefit to the Consumer

So, how does this all benefit the customer? Well, apart from making it cheaper for customers to use unarranged overdrafts, it should also help them to understand how their fees are being charged and how to deal with potential financial difficulty.

At the moment, borrowing £100 through an unarranged overdraft can cost the consumer up to £5 per day, but the new regulations aim to reduce this fee to just 20p per day. For reference, it costs 79p per day to borrow a short term loan of £100 from cashasap.co.uk.

The FCA also aims to ensure that banks do more to identify customers who may be experiencing financial difficulty. It can be very hard if you suddenly become faced with unexpected bills or when your debt starts to become unmanageable, so financial institutions should be able to recognise signs of financial difficulty and point you in the right direction if things start going south.

With any financial product, there will always be areas that need improvement, but reform in this market is invariably lead with the consumer in mind.

It’s not always easy (or quick) to borrow from a bank, and arranged overdrafts can be just out of reach for some people, which is why cashasap.co.uk offer quick short term loans online so you can apply for a small loan to cover your unexpected expense, and repay on a date that suits you.