Overdraft charges could be changing – here’s what you need to know now

Nationwide Building Society is introducing a new single overdraft rate of 39.9%. Here’s why your bank may be reviewing its overdraft charges too.

Nationwide Building Society recently announced plans to overhaul the way it charges for arranged overdrafts across its current account range – and it’s not the only account provider mulling over how it charges overdraft customers.

Others are also making sure they will be able to comply with new rules coming into force next year, which mean a major shake-up for overdrafts generally.

So, even if you don’t bank with Nationwide, it may be possible that you’ll see the way you’re charged for going into the red change in future.

Here’s a look at what’s happening, and why…

What has Nationwide announced?
A new single rate of 39.9% will apply across Nationwide’s adult account range, affecting its FlexDirect, FlexPlus and FlexAccount products. The changes take effect from November 11, and Nationwide says it’s confident they will set a new benchmark for simplicity and transparency. It is also removing all unarranged borrowing charges, along with paid and unpaid transaction fees.

Some customers will see their rate double. Customers had been able to get a rate of 18.9% with Nationwide’s FlexAccount. The Society calculates around 30% of members are expected to see no change or a reduction in their borrowing cost.

Of its customers who will see their costs increase, most will see a rise of 20p per day or less. A “small proportion” who borrow higher amounts more frequently will see a higher cost according to Nationwide, which is pro-actively contacting borrowers to help them explore alternative options.

What’s the background?
A major overhaul to the way providers generally are allowed to charge for overdrafts aims to make the products simpler for consumers to understand and compare. The changes, being introduced by the Financial Conduct Authority (FCA), will be in force by April 6, 2020.

The FCA has vowed to shake up the “dysfunctional” overdraft market – including stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.

At the moment, just a small proportion of overdraft customers account for a significant chunk of the profits banks make from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.

The changes also mean providers will be required to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers shop around. Fixed fees for borrowing through an overdraft will also be banned – also helping to make the overall costs easier to understand and compare with other providers.

What’s the reaction been to Nationwide’s announcement?
Martin Lewis, founder of MoneySavingExpert.com, has previously said that while its new standard overdraft rate looks “shocking” on the surface, “the shock is more due to the fact the costs are now more transparent and easier to compare”.

He has pointed out that while Nationwide has been ahead of the pack in announcing how it plans to comply with the changes, the new rules by the regulator mean all overdraft providers will have to charge via APR – “so comparisons will now be easier”.

What do other providers have to say?
Providers are currently looking over the FCA’s plans – so keep an eye out for any communications from your bank on how it plans to comply with the new rules.

Among the major banks, HSBC UK has said it is looking at its overdrafts in the light of the new FCA rules. NatWest/Royal Bank of Scotland also says it will now be taking time to look through the FCA’s plans. Lloyds Banking Group, which includes Halifax and Bank of Scotland, says: “We are reviewing the requirements published by the FCA in July and will ensure our products comply with them by the required deadline.”

Santander also says it is making sure it fully complies with the FCA’s remedies. Other banks spoken to also say they are looking over their overdrafts in light of the FCA’s plans.

In the meantime, what can Nationwide’s overdraft borrowers do if they are concerned about higher costs?
Lewis has suggested customers could look at other options, such as using a specialist money transfer credit card, to shift the balance to 0% debt.

Giving general overdraft tips, Rachel Springall, a finance expert at Moneyfacts.co.uk, says: “If consumers find they are dipping into the red too often, then they need to review their finances and perhaps switch their account to one which has a decent interest-free buffer.”