Fascinating to see the UK banks’ latest defence of unauthorised overdraft charges. They came under attack from the BBC’s Panorama programme and Vince Cable, Business Secretary, this week. Here’s an extract from a Press Association article…
The banking industry has defended its fees after research suggested people with unauthorised overdrafts were being charged average interest of 167% a year.
Business Secretary Vince Cable accused the high street banks of “ripping off” their customers and failing to be transparent over the fees they levied.
He added that consumers were losing out because of a lack of competition in a marketplace that was dominated by a small number of big banks.
There’s no doubt that the world of overdraft fees is a murky one and it takes painstaking research to fully understand all the potential fees and interest rates to be potentially encountered on the high street - despite the relatively small number of players.
But perhaps the most interesting aspect of the story was the response from the British Bankers’ Association, who argued that:
… as overdrafts were designed to be used for only a few days, it was impossible to calculate accurate annual lending rates.
This response somewhat misses the point concerning lack of transparency, but we can’t help but agree that an annualised measure isn’t the best way to look at the real of cost of something that’s used for a few days or weeks at most.
After all, Wonga is forced to display a typical APR for our short term loan service, despite the fact that customers borrow for a few days or weeks. The nature of the APR calculation results in a completely nonsensical number, so we also show the full cost of repayment.
But impossible? No, it’s not impossible, because unsecured lenders like Wonga already have to use an annualised measure, rightly or wrongly, for a short-term loan product that can provide a much cheaper alternative to going over your limit.
Perhaps the real reason the banks don’t want to apply APR to their overdraft charges is because of the impossibly huge numbers it would generate, as we have highlighted in the past on this blog.