Announcing the Overdrafts Preview!

(Colin Robinson) #65

@alexs I was at the Nottingham met up and asked @Naji about overdrafts - my position is that I can test them with no problem but don’t actually need one so maybe I’m not best placed to give feedback (as opposed to testing the functionality). Not everyone who has the CA card will be offered the overdraft facility at the moment.

(Drew sanders) #66

I did think Monzo may be along the same lines as Starling which as you said is so easy to understand even a child wouldn’t get confused.
I think the 50p a day means that the larger overdraft customers may be better off but for £100-200 it might end up costing a lot of money when you look at a %.

(tom) #67

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 @StuartM 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 :slight_smile:

The Overdrafts Pricing
Starling Discussion & Feedback
What We Know About the Overdrafts / FAQ :moneybag: (open Wiki)
(Frank) #68

I think we need to remember this is a test and first approach from :monzo: at overdrafts. This may not reflect the final overdraft product. So for those of you saying monzo have f****d this up etc. Please take note of the above.

Personally think this is a great debate thread on how overdrafts could be implemented and how others are doing it. But let’s not get carried away.

What I think is missing from this thread is some official responses to genuine questions being asked about the current implementation. @alexs perhaps you could pull out the questions into a single wiki post or even separate thread and link to it from here. Then we can hopefully start getting some officially answered?

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

Probably a daft question, but is the 50p a day capped at all?

If I’m constantly in my overdraft than paying £15pm is going to seem quite a lot.

Also,.is the 50p taken each day, or in a lump at the end of the month?

(tom) #70

Everyone will get the £20 buffer for free.

Buffer on account?
What We Know About the Overdrafts / FAQ :moneybag: (open Wiki)
Does the £20 buffer apply to Direct Debits?
(MikeF) #71

I stand happily corrected :slight_smile:

(Frank) #72

The payment is taken on 1st of every month. And 50p per day is the cap so yes if you are constantly overdrawn you will have a regular monthly debit of up to £15.50

My question on this one is can the payment be on an agreed date instead of 1st as all paydays vary.

Also what if the fee takes you overdrawn. Are these exempt from incurring overdraft fees.

Also what if you are at your maximum overdraft limit. Will the fees continue to take you beyond this?

( related to Monzo CEO, Investor in Monzo ) #73

but wouldn’t you be paying your overdraft off every payday, so unless you are really bad at managing your money - which Tom has mentioned they will have an overview of this from the team so they could help you , you would never get to £15

(Frank) #74

That depends if your salary is being paid into the account or not as this I believe is not mandated. Also your wage could be lower than the overdraft or your debit could be aligned with your salary date so in/out in a single day.

Not scenarios you want to see but very much real world ones.

(Kevyn) #75

Thank you @tom for your reply and clarification on a number of points as well as answering my APR question from earlier in the thread. Your clarification that you will be recognising people who are becoming financially vulnerable because of overdrafts and supporting them is also very good. Thank you. Growing up and also teaching in one of the most deprived parts of the UK, has made me see first hand how debt can trap people in vicious circles hence why I see what I do from my particular angle. I still feel the 869% v 18.5% means I will never probably use it and not really recommend it although I can see where it could be useful so I’m not 100% against it (for example if you need to borrow £800 for 1 day to cover a deposit etc.) and I am happy to reserve my final judgement when you release your final product. Thank you again for your reply and clarification of your position.

(tom) #76

Good feedback - this is something I’ll discuss with the product team. We’ll try to align it with your salary in future, but right now it gets billed on the 1st for everyone.

(tom) #77

Thanks for your patience and understanding.

I think the biggest thing I’ve learned in the last 2.5 years is that most people’s actions and feelings are best explained by behavioural psychology and not always classical economic theory.

Monzo features like budgeting and instant notifications give people little nudges to stay on track and even get out of debt. These are behavioural mechanics, not economics ones.

People are sometimes happy to pay a little more (technically “worse” from a pure economic perspective) for the benefit of convenience, simplicity or peace-of-mind. This can be entirely rational behaviour. I could maybe save £10 by switching my phone provider, but I’d probably have to wait on hold to a call-centre and it might all go wrong. So I sacrifice that saving for an easier life. The average household would save something like £250/year switching their gas and electricity, but 57% of households never switch!

In the next 12 months, you’ll see Monzo start to address problems like gas & electricity switching. Using the data in your account (and only with your opt-in), we can make it a one- or two-click switching experience, removing the hassle & worry from the process. Across this and several other products (insurance, broadband, savings, investments etc), I’m hopeful we can save our customers hundreds of pounds a year.

This is the “marketplace bank” I’ve been banging on about for 2 years :slight_smile:

(Jamie 🏳️‍🌈) #78

@tom Awesome engagement, as ever. :monzo: Monzo setting the bar sky high. Good points about the predictability of fees being as/more important than being the cheapest on the market. This was on the roadmap, I’ve even been selling Monzo like this (“We think you’ll go overdrawn this month. Do you want an overdraft of £250 for 5 days for £2.50?”) as I recalled you describing it as such 18 months ago. Everything falling into place, well done!

(tom) #79

Definitely very real scenarios. You could also lose your job, have a family member fall ill, suffer mental illness or any number of life events that disrupt Plan A. These can all result in problem debt, and we want to be here to help.

@StuartM (LinkedIn) leads the team here whose job it is to help Monzo customers in financial difficulties. He has previously worked giving debt advice in the Citizen’s Advice Bureau, followed by stints at the FCA and Financial Ombudsman’s service. You can read about some of his plans here.

What We Know About the Overdrafts / FAQ :moneybag: (open Wiki)
(Michael Jenkins) #80

If there is no understanding of APR, then it’s probably not a good idea to borrow money as this is how most borrowing is currently charged.

I think it’s an understandable concept that if you borrow more, you pay more. What banks have been bad at in the past is showing how much it costs.

What I like about the implementation shown is the overdraft charges are shown at the top of the transaction list. This could be used to show current charges (in the month, based on APR) and a forecast APR charges based on your pulse forecast.

(tom) #81

You could indeed. But it can get tricky. If the customer starts spending more quickly towards the end of the month, those charges increase above the forecast. That may be obvious to you and me; it’s not obvious to everyone.

But it’s definitely something we’ll consider.

(Dom B) #82

I just got the Lloyds bank letter today. 1p per £7 of overdraft used. I did the calculations. In July my overdraft costs were £14 (£6 fee plus interest of £8). Under their new structure this would be £29!!!

Obviously I’d rather not use my overdraft, but thats life. Happy more to switch now.

(tom) #83

I got this from Natwest in May. £80/month max unauthorised fees. Or £960 per year.

(Simon Porter) #84

Could we not have a tiered amount per day? Similar to an APR in that it increases with the amount borrowed. Easy in that you don’t have to work out APR, more fair on those only borrowing a smaller amount.


£20 - 250 - 10p a day
£251-500 - 25p a day
£500+ - 50p a day