HSBC to bring in a Single Overdraft Rate of 40%

“HSBC has announced changes to its charging structure for overdrafts. This is part of a process of reforming the system of bank charges, partly in response to criticism of the present arrangements made by the Financial Conduct Authority.  It comes also on a day when it was reported that there has been a big increase in household debts.

Average household debt excluding mortgages was reported to have increased by 9% in the two years to March 2018 to an average level of £9,400. Much of this is due to higher student loan and hire purchase debt.

The distribution of these debts is skewed towards the poorest households. The poorest decile of households has debts three times the level of the assets that they own whilst the top 10% of households have total wealth worth 35 times their debts. Overdrafts represent a modest proportion of their outstanding debts but such a facility is likely to be much less affordable than a long-term personal loan which may be arranged at competitive interest rates. This will certainly be the case when compared to the proposed overdraft charges of HSBC.

The bank is removing the daily fee for unauthorised overdrafts and there will be an interest-free buffer on some accounts. The bank and the FCA argue that the present system of charging is opaque and that a simplified charging system will be easier to understand; more transparent and enable consumers to make more informed decisions.

Lost revenue

However, there are concerns that the banks will raise authorised overdraft charges to restore the lost revenue from the unauthorised arrangements. The FCA estimate that while 19 million people used an authorised overdraft facility each year, 14 million used an unarranged overdraft. Firms earned about £2.4 billion from overdrafts and about one-third came from unarranged overdraft fees.

The FCA accepts that interest charges may rise but it argues that the consumer will still be better off as increased competition between the banks will minimise interest rate increases. This may be a rather optimistic approach.

Less flexibility

Typically, bank customers are reluctant to change banks and those with the poorest credit records may find it difficult to find another provider. It is the case that the poorest household have the fewest choices as to borrowing and may well be more likely to utilise overdrafts.

These changes take place at a time when other sources of loans have disappeared. The pay-day loan companies such as Wonga have closed after a welter of bad publicity regarding the interest rates charged. However, their demise reduced the legal alternatives available to the less well-off in society.

People do need flexibility in meeting day-to-day expenditure and even HSBC admit that around one-third of their customers could be worse off. Those who lose are likely to be those customers who have the fewest alternatives.

One other possibility of these charging reforms is that ‘free’ banking for those in credit will be threatened. Currently the banks cross-subsidise customers in credit with the fees and charges made on overdrafts. If there are fewer profits to be made from these sources the system of free banking will have to be reviewed.”

• Read more on this story on the BBC News website.