Up to 90 percent of Lloyds Banking Group customers could be better off when the bank abolishes unplanned overdraft charges in November, as part of an overall policy change.
The group, which includes Lloyds Bank, Bank of Scotland and Halifax, said overdrafts can be complex and confusing for customers, so it is now simplifying the product for current account users and removing fees charged when customers go beyond overdraft limits.
From November charges for missed overdraft payments, and all other associated fees with unplanned overdrafts, will be removed.
A statement from Lloyds states: “At the moment, a customer who goes beyond their limit would typically face charges for being in an unplanned position. In future they will face no such charges. Additionally, in situations where an unplanned overdraft isn’t authorised and a payment is stopped, there will be no returned item fees.”
However, new charges will be introduced.
Each day one pence will be charged for every £7 of planned overdraft usage. A daily fee will also be charged at the end of each day of planned overdraft usage, avoiding cumulative fees being charged weeks later.
As an example, under the new charges scheme, a Lloyds Bank customer with the classic current account who goes overdrawn by £100 within their planned limit for 10 days, will pay £1.40. Previously, they would have been charged £6.38.
The group said nine in 10 personal current account customers will be either better off or unaffected financially by the changes.
Vim Maru, group director of customer products and marketing at Lloyds Banking Group, said more than 80 percent of customers said they would prefer the new approach compared to the current policy.
The group will write to all customers at least two months before the new overdraft policy comes into effect to clearly set out the changes. It will individually write to customers who have higher overdrafts who will then be provided with extra support.
Mike O’Connor, chief executive of StepChange Debt Charity, welcomed the new approach: “This looks a positive step forward, but there is a need to monitor what happens next, not least for the questions this announcement poses for the overdraft market as a whole.”
However, Mark Somers, chief operating officer at credit risk consultancy 4most, said this approach could mislead customers. He said the new charges on overdrafts imply to customers it is cheap money.
He said a more responsible approach would be for banks to pro-actively offer to turn overdrafts that account for more than 25 per cent of monthly income into a repayment loan at a much lower rate.
“The interest charges on unauthorised overdrafts are still high, currently higher than 68 percent APR once typical charges have been included. While lower than they were, there is still no sign of risk-based pricing.”
Although he did say Lloyds’ approach to overdrafts is expected to increase competition from open banking based services that collate overdraft debt into more affordable loans and other forms of money management services. He said this will, in turn, force high street banks to further reduce rates over time.