It’s very telling that this comment is at the very beginning of your post though because it is the most important point that you’re missing.
To me, it seems like this is very much a solution that’s been chosen (by users & Monzo) based on feelings, as well as analysis. In my own experience; firstly I want control over my finances & secondly, in order to have that, I need clarity about how much I’ve paid for things & how much I will pay. That gives me a sense of empowerment on the one hand & reduces my anxiety about my finances on the other.
Monzo solved the first problem with their live balance - probably their second most talked about feature aside from the fee free FX.
They’re about to solve the other problem by making it as simple as possible for users to understand exactly how much they’ll pay when they use a Monzo overdraft. Thanks to this fee structure, there’s no concerns about how much you’ll end up spending before the end of the month & what that will translate into, in terms of costs from interest or from entering the next tier of fees. It’s that simple for me.
If I can see that if I use an overdraft at this point in the month, I will pay up X amount - something that no other bank explains clearly - then I can make an informed decision about whether that’s affordable & worthwhile for me or not. That, combined with Monzo’s other features is worth far more to me than paying X % less with another bank.
Having said all that, I‘m concerned about the potential consequences of this too.
There’s a number of ways that Monzo can address this though. For example, if they only lend users what they know they can afford to pay back quickly, based on their salary & monthly expenses (a revolutionary [sarcasm] concept which AFAIK, none of the bank’s have adopted), then users wouldn’t be able to get sucked into using overdrafts for long term credit.
I don’t believe that an alternative approach that makes it harder for users to work out how much their overdraft will cost them is the right solution.