Announcing the Overdrafts Preview!


(tom) #124

Some really well thought-out posts here, which I really appreciate.

I can certainly believe we don’t yet have the right model, and I’d really value your input to help us get it right. I don’t think there’s a clear cut answer, as the debate here probably shows.

For the moment, I’d encourage everyone to see this less as “Monzo sets long term overdraft pricing” and more like “Monzo trials a new product with a few hundred people for a couple of months.” We’ll be gathering more feedback as we go, and we won’t make any decision without properly consulting the community.

I would love to do some medium-term trials with significant sample sizes (I guess 6+ months with 30,000 people) to see how different pricing models actually change behaviours. I’ve been reading a lot of stuff from Thaler and Benartzi recently, and I wonder if we can support them with some empirical research. We’d need to think through the ethical and regulatory considerations properly first.

In the shorter term, we’d love to talk to as many of you here as possible, either over the phone or face-to-face at our office in London. You’ve obviously thought about this subject a lot, and we’d love to get your input as we decide what pricing options to trial next.

I’m supposed to be on holiday from yesterday, and my girlfriend is going to lose patience if I don’t stop spending all my time on the community forum debating overdraft pricing! I’m about to head into the Italian hills on a bike, so I’m going to hand over to @tristan (who is back at work on Tuesday I believe) and @naji to organise these feedback sessions over the next few weeks. I’ll be online again on the 4th September.

Even though we don’t always agree, I’d like to thank you all for caring enough about other people’s finances and wellbeing to turn up and have the debate.

:wave::biking_woman::national_park:


What We Know About the Overdrafts / FAQ :moneybag: (open Wiki)
#125

From someone who has been subjected to abuse on these forums for daring to suggest that Monzo introducing charges is a bad thing (regarding foreign ATM withdrawals); I find it laughable that those same people are now crying about how much it will cost them to use the overdraft facility.

Simple rule people: If you can’t afford it then don’t buy it.

No amount of shiny, all singing, all dancing multi-coloured apps will prevent you from spending money you don’t have. Common sense and financial maturity will. Remember what your parents told you :stuck_out_tongue:

On to the subject of overdrafts and how to pay for it:

  1. It’s not your money. You are borrowing money from Monzo so yes, you are expected to repay this temporary loan (that’s what it is after all) and add a bonus to them as a “thank you”.
  2. Charges: Charges should be punitive. If you can’t afford it then don’t buy it; even if it means you sit at home on a Saturday night instead of beer, food and enjoying yourself with your mates / partner / whoever.

(Alex Sherwood) #126

As the community guidelines state, there is zero tolerance for abuse in this community.

If you have concerns about other user’s comments towards you, please flag the posts &/or let one of the team know, by sending them a DM.


#127

I’m struggling to see how tiering would work.
It’ll just be different/similar complaints that £100.01 costs the same as £200 so people will just take more overdraft.
I really don’t agree that a majority of people will do that. Those who would have different issues that can’t be solved by a financial institution.


(Sacha) #128

As someone who previously used and then ended up “living in” an overdraft until a few years ago (as ever, drawn into one from the interest free offering given to me when I went to university) I would be curious as to what Monzo will do to help those who end up in the same position now.

My legacy bank clearly wasn’t bothered beyond presumably doing the statutory minimum (I think they sent me periodic letters every so often saying “guess what, you pay charges for being in your overdraft” or words to that effect), but thinking about it, there are ways your bank could help you. Perhaps asking if you would like to slowly reduce the limit down month on month by £50/£100.

There is always going to be a conflict between creating revenue from customers (i.e. incentive to have the overdraft) and financial benefit of customers (e.g. not needing an overdraft), but if Monzo was seen to do the right thing it would foster goodwill which could increase the likelihood of taking other services like energy or broadband switching which would have their own affiliate revenues.


(Jolin) #129

That’s a good point, Sacha. Something that doesn’t seem to have featured in the discussion so far, is that Monzo have a Head of Financial Difficulties with a team dedicated to trying to prevent people from being in financial hardship. I don’t know how this compares to other banks, but it seems to me Monzo’s approach to overdrafts is to not keep people in them, but to help them use them temporarily and then get out of them. Which is not an approach I feel traditional banks take (building societies excepted).

And from back in January when Stuart introduced himself:

Monzo have clearly done a fair bit of research into approaches to overdrafts already, and are now testing this with a larger pilot. But the overdrafts also have to be taken in the context of the rest of Monzo, including the Financial Difficulties team, and the future Spread the Cost product. How overdrafts end up being used, and what their total cost to people, will depend a lot on the details of what the limits are, when you are steered to a different product, and how the financial difficulties team works with people who are struggling to get out of their overdrafts. Tom was pretty clear above that he doesn’t want people to be using their overdrafts for long periods of time.

tl;dr from me is: There are some genuine concerns over the flat rate; but Monzo haven’t slapped this together without careful consideration; or without concern for their customers’ well-being; and it is just one (important) piece of the lending puzzle; so I’m willing to give them the benefit of the doubt to see how this works out on a larger scale. (Not that it’s up to me! :laughing:)


(Ian Lyon) #130

I’ve worked for a couple of banks in the past (Clydesdale & Santander), and they’ve both had the facility to apply what’s known as a ‘reducing overdraft’ :eyes: It’s really just an arrangement whereby the bank agrees to reduce your total overdraft amount each month on an agreed date, typically when your salary is paid in :moneybag: This is usually done with either the bare minimum or zero interest charges applied!

The problem with this, is that legacy banks make a ton of money from overdraft charges! :money_mouth_face: It isn’t in their selfish interests to promote this kind of thing proactively. With a wink and a nod I was always told these charges were ‘meant as deterrents’ and the bank ‘made no money from them’, but I think we all know that’s far from the truth :lying_face:

In this respect, I’d imagine there’s scope for :mondo: to do something different and implement some method of machine learning or AI to spot trends in your overdraft usage :robot::chart_with_upwards_trend: It could use this data to determine whether or not you’re having problems getting out of your overdraft and promote any overdraft reduction tools proactively. This would be massively helpful for people trying to get out of the debt spiral, and it’d ease the burden of COps (or any other relevant team) to monitor this manually.

Finance is a pretty sensitive subject for most people, and it can often be embarrassing to admit you have a problem to another person :worried: This is why people bury their heads in the sand when it comes to debt and problems spiral out of control; the act of taking the first step and speaking to someone can be really difficult - especially with the reputation legacy bank customer services have. If these kind of features were promoted proactively without the need for human intervention, it could help people make that first step to getting out of debt earlier without the fear of embarrassment or anxiety when speaking to someone about it.

(I realise I rambled on a bit stream-of-consciousness like there, but it’s some food for thought I’m sure :thinking:)


(Hugh) #131

I think this line of discussion (how to support those who are persistently using overdrafts/are in debt) is probably more useful than discussing the finer points of the overdraft_trial_ fee structure.

I think the idea of overdraft reduction tools are very interesting. Instead of taking 100% of your salary to pay off the overdraft and put you closer into the black…until you have to pay all your bills, taking say 5%/10% to pay off your overdraft whilst leaving the rest of your salary for “staying alive” is a very good idea. Practically speaking, I guess this could be achieved by having a “overdraft pot”, so, if you have been flagged as in bad financial shape, the overdraft balance is transferred to a pot in app, which is gradually reduced each month as you pay it off. Then, there isn’t a rather large, depressing red number at the top of your feed (necessarily) but you are paying off the balance.


#133

I don’t think that’s financially sensible at this point.


(Tommy Long) #134

I know this is likely unrealistic because of the potential to game the system but if the point of 50p per day is “it costs a bit more but some people prefer clarity” then why not let them choose which model they want to use? Allow selecting between 1p/£10/day and flat 50p/day.

Yes, this has the potential to earn Monzo a bit less but you give people the choice between paying less and getting clarity (and it provides some superb A/B testing for people’s actual preferences).

My girlfriend sits roughly constantly £200 overdrawn because it only costs her around £3/month to do so. To switch to Monzo would cost her £15/month so it just won’t happen (and if it does she’ll probably end up maxing out her overdraft to take advantage of the fee structure).


(Tristan Thomas) #135

My gut feeling on this is that it would end up being super confusing to customers — how would you avoid that?


(Drew sanders) #136

I like the idea of the customer having a choice. I can also agree with your point about maximising overdraft based on costs. Monzo have said they don’t want people to constantly use them so will they limit useage or message customers about their useage.
I suppose we can just wait and see.


(MikeF) #137

I’m don’t know if you can. The issue you have once options like this appear is the level to which you can assume that any choice is an ‘informed’ choice. Once that becomes a grey area then you open yourselves up to all sorts of possible problems.

Personally, I think the bank needs to decide what to charge based on its own philosophy. Leaving this to the customer feels like an abrogation of responsibility in this area of financial responsibility which has preveiously been identified as a key one for Monzo.


(Tommy Long) #138

I agree that it has the potential to be confusing unless it’s well thought through.

I think you’d have to implement the “1p/£10/day” scheme by default where the app would show you how much your current borrowing is costing you per day, say for £200 overdrawn it’d be “18p/day interest” (because of the £20 free margin) and once you click on that “18p/day interest” it’d take you to a new screen with a breakdown of how the cost is arrived at, an explanation of how overdrafts work and the ability to “cap” your interest at 50p/day. Over time Monzo could look at using machine learning to recommend the approach for a user that is most suitable (and cheapest).

The alternative is a compromise approach, although it would end up costing Monzo some of their profit. You’d simply do “1p/£10/day” with a cap at 50p/day. I get that this is less simple and clear than a simple 50p/day but no-one has ever complained at something ending up cheaper than they expected to pay and that way you do have the clarity that your overdraft will never cost more than 50p/day.


#139

I expressed an interest in the overdraft and I am excited to try it out at some point.

I can see the benefit of a 50p/day structure as it’s REALLY easy to know exactly what it will cost you.

I am not usually overdraft and I pay my credit card bill in full every month so I guess I am probably not a very lucrative customer from a bank perspective. I do however have an overdraft set up for emergencies.

My problem with this current structure is that it is only advantageous for me as a customer if I borrow at least £250, which in my case is unlikely as my credit card bill never exceeds £100.

As a bank, wouldn’t this approach also limit the amount of customers that would use the overdraft? Surely there is a bit chunck of your userbase that are students and young professionals that are more likely to want to borrow £50-£100 than £250+? And as you will be relying on overdraft to make money l don’t understand why you are limiting the userbase in this way? What am I missing?

And I’ll keep using my credit card as for smaller amount I am better off using them rather than Monzo.
However good to know that if I ever need a bigger amount to make a deposit I can rely on Monzo for a transparent borrowing fee.

I understand that tiering of rates makes it more complicated to predict what the fee is. But maybe you could re-calculate it each time a tier is reached. And being very transparent about it by saying you have borrowed £100 for 10 days at x p/day and that cost you £y if you now borrow another £100 for days at xx p/day so you total is… That way Monzo would be fair to everyone and a lot more people would be willing to borrow from you


(Alex Sherwood) #140

There’s plenty of users like yourself but

Figures from the CMA’s 2015 retail banking financial performance report.

And while we’re on the subject, that also plays into the APR / AER comparisons discussion because obviously a borrower who has a £700 overdraft has a much lower APR / AER than one who’s borrowed less..


#141

I think that’s partially the point of this approach too. It’s showing people up front what this overdraft will cost them. There’s a constant reminder that they’re paying 50p a day for this.
Most(all?) other banks only tell you at the end of the month, bit late to do anything about it then.


(Jake Tame) #142

Thats a crazy amount! I didn’t realise it was so high. I’ve not ever had the need for an overdraft, thankfully.

I can see benefits to a single daily charge amount but I’m not sure it promotes healthy spending as a £200 overdraft will cost the same as a £1000 overdraft with a single day rate. It should be tiered.

Between £25 to £200 the figure is 20p/daily, over £500 to £1000, its 50p etc… (Just an example) with an upper limit maybe to prevent bad spending, if the figure starts to hit the upper limits then maybe a feed item to offer a longer term loan based on consumption / days used.


#143

Looking at that average I am one of those that helps balance out all those who don’t have an overdraft :joy:


(Frank) #144

An overdraft is useful for me for when an unexpected payment debits that I have not accounted for. So the payment is not rejected and I have time to rectify the situation.

I don’t think monzo would want people to be in overdrafts long term and so for me can understand the 50p fee.

What Limit you can utilise would need to be a careful decision as offer too much to someone that cannot afford it and they can very easily become stuck in it. guaranteeing them £15+ per month in charges.