Lots of strong (& vocal) opinions about this, which is good. We launched the overdraft preview to see how it works in practice, and we’re totally open to changing it depending on customer feedback. But I’d ask you to reserve judgment until you’ve tried it in practice for a couple of weeks to see how it feels.
I’d also like to share some background - we’ve spent about 4 or 5 months trying different options and running various user-feedback sessions, surveys and focus groups. The amount of research we’ve done was perhaps not as clear as it could have been in the blog post.
After the focus-groups, we went out to survey a sample of the user-base with several different pricing options. 50p/day was tied as most popular option (alongside 1p per £10 per day I believe). People overwhelmingly said they didn’t understand the APR options we gave them, which is why we haven’t gone down that path. The company internally was also pretty evenly split between 50p/day and 1p per £10 per day. It was ultimately a product decision to test 50p/day first, and I support that.
As with any product design choice, there are tradeoffs. 50p/day is very clear - that’s its main advantage. It’s easy to say “If you continue to be overdrawn for the remaining 8 days of the month, you will pay £4. There are no other fees”. That reassurance is very valuable for a lot of people.
With a 1p per £10 per day, it’s harder to predict exactly what people will pay at the end of the month. You end up having to say “You’re currently £500 overdrawn. If you continue at this balance for 8 days, you will pay £4. If you use the maximum overdraft available (£1000), you will pay £8. The reality will be somewhere between those two figures.” It’s not the end of the world, but it loses some clarity.
The obvious downside of 50p/day is that it is more expensive to borrow very small amounts. There’s clearly a boundary problem - if you maintain a negative balance of -£21 continually for a year, you’d end up paying £185 in charges, or an eye-watering APR of 869%. Borrowing £1000 for the year would be 18.5% APR.
1p per £10 per day has less of a boundary problem - you could borrow £0.01 for a year and incur £3.65 in charges - but it’s academic.
While technically correct (and some people will inevitably scream about extortionate payday lending), it’s just a demonstration that APRs don’t make a tonne of sense at lower amounts. The way most people think about this (according to our research) is - “If I’m a couple of hundred quid into my overdraft for a few days, it’s 50p a day, or a maximum of £4 before I’m paid. It’s really convenient, and that feels like a fair amount.”
So, we’re testing 50p/day first as our research suggests it’s the most convenient and easily-understandable model. This may not turn out to be true, in which case we’ll take onboard feedback and try a different model. As an aside, according to our forecasts, 50p/day was not the profit-maximising model, but it depends on what you believe the average overdraft balance will be. We’ll have data on that in a few months’ time.
It’s also worth emphasising that, before you go into your overdraft, we will alert you in the app and tell you the maximum it will cost. You can decline to take an overdraft and we will just bounce payments when you get to £0, with no charges. I’ve been hit with unexpected overdraft fees from my old bank, and it was something we really wanted to avoid.
We expect people to dip in and out of their overdraft. If you want longer-term credit, overdrafts are not the best way of borrowing. We have a team lead by @anon79397384 that is responsible for identifying people in persistent overdraft debt and helping them get back to a healthy financial position.
I know borrowing can be a very emotionally-charged subject and uncontrolled debt can have a profoundly negative impact on people’s mental health. We started Monzo because we think we have a genuine opportunity to help a large number of people. We get emails and tweets from people on most days of the week now, telling us how we’ve helped them stay on-budget and recover from debt. That’s not something we’re going to sacrifice.
Yes, we do have to make some money to be viable as a business. It doesn’t mean we have to sell out and start ripping customers off. I know some of you don’t agree with the 50p/day model. That’s great feedback - I’d love you to help us find an approach that you think is fair, simple and transparent 