Lloyds say nine out of 10 customers will either be better off or see no change. Photograph: Peter Nicholls/Reuters
Lloyds Bank is to radically change the way it charges for overdrafts on its 20m accounts, including those at Halifax and Bank of Scotland, in a move it claims will leave most customers better off – although one in 10 could pay significantly more.
All existing charges for overdrafts will be abandoned in November and replaced with a single fee of 1p every day for every £7 of overdraft used.
It comes ahead of moves expected by the Financial Conduct Authority to cap “extortionate” fees for unplanned overdrafts, which critics say can work out as bad as the fees charged by payday lenders.
Under current Lloyds rules, someone who goes more than £25 over their overdraft limit is charged £10 a day, and also faces a £10 fee for every payment that is bounced, called the ‘returned item fee’. They also have to pay 19.89% interest on the balance.
These charges will be scrapped under the new regime. From November, it means a customer who uses their £1,000 overdraft for 10 days and spends two of those over the limit with an ‘unplanned’ overdraft will be charged £14.20, compared with £30.93 currently.
Other winners will be those who don’t go far into the red each month. Currently someone who goes £100 overdrawn at Lloyds for 10 days a month will pay £6.38 a month in fees, but under the new system this will drop to £1.40.
Lloyds said nine out of 10 customers will either be better off or no worse off than before.
But the losers will be those customers who have large agreed overdrafts and use them a lot each month. Lloyds said someone who has a £1,000 overdraft limit and uses it for 10 days a month will now pay £14.20, compared with £10.88 before.
The bank admitted that the 1p per £7 overdraft is equivalent to an APR of 52%, and said it would encourage regular users of large overdrafts to switch to a personal loan instead.
Last year the Competition and Markets Authority completed a two-year probe into banking, in which it highlighted how the big banks make around £1.2bn a year from unarranged overdraft fees.
Lloyds said it will lose revenue because of the changes, but refused to specify how much. The bank operates around a quarter of all current accounts in Britain, which suggests that it currently takes around £300m a year in fees that will now be abandoned.
Vim Maru, group director of Lloyds, said: “This new approach is simple and clear, giving customers more control of their overdraft borrowing and how they manage their finances. When asked about our new approach, over 80% of customers said that they preferred it compared to the current charging format.”
The switch to flat-rate charging, a first among the major banks, is as much to do with the threat from ‘fintech’ challenger banks as the CMA inquiry, said Lloyds. Customers have switched en masse to app-based banking, it said, which means the bank can text customers and warn them of charges far more easily.
“Customers who have given their mobile number to the bank will automatically receive free text alerts, including low balance alerts, putting them in control of their budget,” said the bank.
Students will continue to benefit from the interest-free overdrafts they are given when taking out an account, the bank added. But the current ‘fee-free buffer’ of £25, which allows any customer to go overdrawn up to £25 without incurring fees, will disappear. The 1p per £7 deal means that a customer who goes up to £6.99 overdrawn during the month will not be charged anything, but after that will start incurring charges.
The new charging regime harmonises the fees across all of Lloyds’ brands, including Halifax and Bank of Scotland. Halifax has a lower, £5-a-day, fee for unplanned overdrafts, so the benefits for its customers will be slightly less.
Other major banks are now expected to revise their overdraft deals. Personal finance expert Andrew Hagger of Moneycomms.co.uk said: “This is a fairly radical move by Lloyds and will be welcomed by customers who have in the past been hit with by the costly unauthorised charges under the bank’s existing tariff.
“At present someone who is £26 overdrawn without arrangement could potentially be charged £86 in unauthorised and monthly fees, something that’s very difficult to justify.
“The FCA is looking at the cost of short term credit and I’m sure Lloyds won’t be the last bank to review its overdraft tariff in the next few months.”