Last month, the group behind some of the biggest names in retail banking announced that it would be simplifying the fees charged for planned overdrafts and scrapping fees for unplanned overdrafts altogether. Lloyds Banking Group customers will now be charged 1p per day for each £7 of planned overdraft used, and any fees owed will be taken on a daily basis.

This effort to introduce a ‘pay-as-you-go’ approach means an end to charges being debited from the customer’s account weeks later. Customers of Lloyds Banking Group brands, including Halifax, Lloyds Bank and Bank of Scotland, will see the changes to their overdrafts take effect in November 2017.

Research in Mintel’s Current Accounts UK 2017 Report reveals that around a quarter of current account holders say they use their overdraft regularly (ie each month), with a similar proportion of Lloyds Banking Group customers saying the same. Given that this doesn’t include people that only dip into their overdraft every now and then, it is clear to see that this could have a big impact.

The Group expects nine in every 10 customers to be better off financially or in the same position as before the changes. All customers will be contacted about the changes and any customer who has provided their mobile number will now be automatically opted into text message alerts about their overdraft.

A dark horse

Consumer groups and regulators have criticised overdraft charges, with some raising fears that they have the potential to end up proving more expensive than payday loans. However, there is no doubt that regulation is closing in on costly credit. Last year, the Competition and Markets Authority (CMA) announced that by the end of September 2017, all banks would have to introduce a maximum monthly cap on unarranged overdraft fees. The Financial Conduct Authority (FCA) has just published the results of a wider investigation into the cost of credit, revealing specific concerns about the cost of unarranged overdrafts.

The FCA now plans to conduct a review of unarranged overdraft products, aiming to decide if new rules are needed by Spring 2018. It is likely that Lloyds Banking Group management sensed there could be rule changes in the near future, and took the chance to get ahead of the game with the restructure announced last month.

The customers have spoken

As part of the announcement, Lloyds Banking Group revealed that a resounding majority of its customers said they would prefer the new charging structure it has now opted for. This means that a simplified overdraft structure may also appeal to customers at other banks and with Open Banking on the horizon, this presents an opportunity to attract new customers.

Research in Mintel’s Current Accounts UK 2017 report reveals that around seven in 10 regular overdraft users say they know what the charges/interest rates are for their overdraft, and four in five say it is important to them to have a current account with competitive overdraft charges. The CMA has also found that overdraft users are more likely to benefit financially from switching current accounts than non-users. This shows what a good selling point the new charging structure could be for the Group’s brands. Well, until the rest of the market catches up, that is.

Playing catch-up

Lloyds Banking Group has made a proactive move towards a fairer overdraft. Pressure from regulators and consumer groups, combined with the voice of their own customers, made it a shrewd decision to act early. The rest of the retail banking market is expected to follow suit, whether by choice or by force, as the pressure for a fairer market continues to build.

This comes at a time when customers are facing their own pressures. Incomes are being squeezed by stubborn, if unpredictable, inflation. The rationale for simpler fees will only continue to grow, with Lloyds Banking Group leading the way.

Patrick Ross is Senior Financial Services Analyst at Mintel, writing reports and analyst insights for Mintel’s UK Financial Services team. Prior to joining Mintel in 2015, Patrick worked in both the payments and insurance industries, as well as working as an analyst for a market research company.

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