Overdraft overhaul: How the change to fees will affect you

Nationwide Building Society recently announced an overhaul of how it charges for arranged overdrafts across its current account range – and it’s not the only financial giant mulling over such changes.

Other banks are making sure they will be able to comply with new rules coming into force next year, meaning 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.

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 company 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.

What’s the background?

A major overhaul to the way providers are allowed to charge for overdrafts aims to make 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 next year.

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 customers account for a significant chunk of the profits banks make from unarranged overdrafts. More than 50% of banks’ fees in such cases came from just 1.5% of customers in 2016.

What has 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 regulator’s new rules mean all overdraft providers will have to charge via APR – “so comparisons will now be easier”.

What are other providers saying?

They are currently looking over the FCA’s plans – so keep an eye out for statements from banks on how they plan to comply with the new rules.

What can Nationwide’s overdraft borrowers do if they are concerned about higher costs?

Martin 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.