Lloyds Scrap Overdraft Fees - (our) 11 Reasons Why
Lloyds Bank announced last week that as of November 2017 it will scrap all prearranged overdraft charges in a huge fee and charges shakeup, reducing them to just one overdraft rate. Customers who get overdrawn, regardless of the overdraft arrangement they took out, will be charged 1p per day for every £7 they are overdrawn.
We discuss the repercussions of this shakeup.
The current Lloyds charges, ahead of the restructure coming in November, say that someone who goes more than £25 over their overdraft limit is charged a flat rate of £10 a day, and they also face a £10 returned item fee’ for every payment that is bounced, due to lack of funds. Customers also have to pay 19.89% interest on the balance. Therefore, in combined fees you could end up paying more than the amount you’re overdrawn by, which seems highly unfair. Lloyds say that going forward 9/10 customers will be positively impacted by these changes.
This is a big story that has a lot of ramifications for both Lloyds Banks and their customers.
It provoked a lot of discussion at 11:FS and with our guests on our podcast, Fintech Insider, speculating on the provocation for Lloyds making such a strategic move at this particular point in time, and the impact this will have. Here's our 11 reasons why:
1. A compliance play
The CMA have recently been cracking down on punitive practices, and capping extortionate fees, so in this move Lloyds are getting in ahead of the curve. They are making a positive step early and out of choice rather than after provocation by the CMA, which looks better for their reputation.
Equally, while the CMA are drawing up specific new guidelines capping fees, have Lloyds realised that it is easier for them to scrap these fees altogether rather than adjust piecemeal to fit into CMA’s new criteria?
This approach was suggested by Ghela Boskovich on Fintech Insider this week. She suggests that removing the range of overdraft fees and the resource involved in managing them saves money for the bank and proves that they’re within the guidelines by default. It is less time, cost and effort to remove fees entirely than have to expend resource proving by small percentage margins that they are within the CMA’s guidelines.
Have Lloyds realised that it is easier for them to scrap these fees altogether rather than adjust piecemeal to fit into CMA’s new criteria?
2. A Marketing Ploy
This announcement also gives Lloyds a marketing edge over some of their competitors if they can advertise no (arranged) overdraft fees, when many big banks still have them - even if they’re not the first to take this step - Barclays scrapped their overdraft fees as early as June 2014. Could Lloyds stand to poach customers from other big banks whose fee structures are still in place?
As David M. Brear put it, this very public announcement is a marketing tool that is both a defensive and offensive play to keep customers and attract new ones - like all incumbents, Lloyds are currently "fighting a war on two fronts” - to set themselves apart from both their competitors and fintechs and challenger banks.
"Lloyds are currently fighting a war on two fronts, to set themselves apart from both their competitors and fintechs and challenger banks." - David M. Brear
3. Greater transparency
Previously, big banks, including Lloyds, had an overall lack of visibility compared to challengers in their fee structure and other “hidden” costs. Could this move be a shift in the overall Lloyds business model for greater transparency with their customers?
4. Levelling with customers’ high expectations
This view was also supported by Jeff Tijssen and Ghela Boskovich on Fintech Insider. They thought that possibly the move was brought about by customers’ own higher expectations of their bank and its services - they will no longer accept a lack of clarity or high costs. Big banks cannot risk their current account customers deserting them, especially as more and more challengers are getting banking licences and setting up competitor current accounts. Only this week both Monzo and Starling have announced new developments in their current accounts, to a largely favourable reception.
5. Revenue Impact
However this scrapping of fees, while ostensibly good for customers, has revenue repercussions for the banks too. Studies suggest that big banks earn 31% of their revenue from current accounts, mostly from interest and fees from the overdrawn. What happens when there’s no charges? It costs big banks far more to maintain customers’ current accounts than it does a challenger bank. This is mostly because challenger banks are digitised, and leaner, with less overheads such as high staffing costs, and no branch running costs, making their revenue streams go further.
6. Death of the current account?
If big banks can’t earn back revenue from extolling fees, where will the money come from? How will they make up their profit? Operating costs are too high, as they are such enormous organisations with many levels of operating and staffing structures, and a lot branches are required by law to stay open, so they can’t suddenly cut staff or close branches en masse in order to accrue back lost revenue. Is the current account the best product for them to continue to provide? Nearly everyone in the UK has one, but if they are so expensive to run and manage, is this the best revenue stream for the bank to rely on? Possibly not. Jason Bates asks: “Are we about to witness the death of big bank current accounts?”
“Are we about to witness the death of big bank current accounts?” - Jason Bates
7. Burn to maintain, not burn to earn
Jason Bates also commented that to absorb this loss of revenue stream, banks will be forced to burn to maintain rather than burn to earn. I.e., they will have to use up other revenue streams and/or utilise VC money just to subsidise their losses and to keep their current account customers for the time being, once they scrap these fees. This is the opposite of the “burn to earn” start-up approach, favoured by Uber predominantly, but also other challengers in the fintech space such as Revolut and Transferwise.
8. “No” fees but higher interest rates
The new fee structure puts all customers on the same level: they will incur a debt of 1p per day for everyday that they are overdrawn over £7. This doesn’t seem a lot, but some commentators, such as Andrew Hagger of Moneycomms, are calling the charge “arbitrary” and clearly designed by Lloyds to plug the gap in their revenue from removing the prearranged overdraft fees.
Additionally, Lloyds have also announced (with far less fanfare) that alongside scrapping the fees, the interest rates with which the overdrawn will have to pay back their money is going to rise steeply from a rate of 19.89% to 68.4% on an annual basis. This is clearly an alternative way of earning back some of lost revenue from these overdraft fees, and one that has been far less publicised.
The interest rates with which the overdrawn will have to pay back their money is going to rise steeply from a rate of 19.89% to 68.4% on an annual basis.
9. Deliberate loss of market share to avoid disruptors taking it from them
A view expressed by Jeff Tijssen and Ghela Boskovich on this week’s new podcast was that this was perhaps a deliberate "self-cannibalising move". They suggested that perhaps it’s in big banks’ interest to take the hit now. To lose market share now, while challengers are still small fish in a large pond, allows big banks the time to absorb the loss of profit and source alternative revenue streams before the challenger banks grow and begin to do it for them.
10. Deliberate loss of revenue to maintain loyal customers
While there’s never a good time to make a loss, studies suggest that average consumers are not yet in a rush to move to a challenger bank, or even to move banks at all. David M. Brear suggests that while they still have loyal customers, it could be the best time to be making customer-positive but revenue-damaging changes in the interests of improving output for the future - before challengers can impact this and add to the losses. If nearly ⅓ of the banks’ revenue comes from current accounts, is it worth losing 33% of business in order to better invest and retain the other 66%?
"Is it worth losing 33% of business in order to better invest and retain the other 66%?" - David M. Brear
11. Shift in business model
A more future-proof suggestion from our guests on Fintech Insider or maybe a wishful hope was that fee scrapping could be just the beginning of a brand new business model from Lloyds (and other incumbents) going forward. The business model that they want to see is one that’s less punitive and more informative or advisory. One where your bank notifies you if you’re about to get overdrawn before it happens and advises you on what your options are - to pause a payment, to take a short-term loan etc. This also allows banks opportunities to up-sell to its customer base; in a differing approach to making money through fees, it can gain back the revenue in new, advisory ways that make the bank more user-friendly and more endearing to the customer, which inspires loyalty.
However, we must stress, all of this is speculation, we now wait to see what the true repercussions turn out to be, and if any of our commentators were right. Watch this space.
For more information on the contributors to this post, check out 11FS.com/about-us, listen to Fintech Insider episode 113: Is Cash Dying?, where we discuss this news story in full, or subscribe to Fintech Insider on iTunes.
