Sounds good to me - good explanation. Thanks.
Halifax’s new per day model is going to cost my partner £40 more a month when it starts in November
I’m still not convinced about that overdrafts approach, despite lengthy and details explanations from Tom. I totally loved it though .
Just to be clear, I don’t want overdraft, I never had any and I don’t plan to have one. But I still judge what Monzo does and offers , and current 50p/day overdraft doesn’t make me want to get an overdraft (and one might argue that it’s good ).
My ‘meh’ about 50p/day is probably because it doesn’t seem like smartest solution that I hoped Monzo would be able to get to. Subconsciosuly I hoped that Monzo will have simplest/cheapest/smartest overdraft product and my expectations were set really, really high. I know it was well researched, as Tom said, so I can acknowledge it might be the simplest solution, then cheapest - depends on the amount, but I’m not sure if it’s ‘smart’, if it has this Monzo stamp all over it.
I cannot deny what customer feedback and research said, but that seemed to create the product that’s “just” easy to understand (simplicity). That’s something and many other banks don’t get it, and this already makes Monzo overdrafts awesome.
It’s very early, and I think it’s good first version of the product. I’ll shut down my subconscious that wants Monzo to do remarkable stuff on first try. I’m definitely going to observe next iterations of this product and I hope that Monzo will be able to show/prove that this solution is also ‘smart’, or there’s some sort of magic in there.
I wouldn’t want monzo to just be the cheapest at everything as this can generally mean a compromise in quality. What I want monzo to be is smart. And at the moment I think they are being as smart as their current maturity allows.
For example using the MasterCard rate for foreign transactions is smart as its a great customer benefit and is no cost to monzo.
Also the notifications for transactions are smart.
So the thought of possibly paying 50p should I dip into an overdraft I am happy with knowing I will benefit from all the smart things I will receive from the bank.
It is very easy to take one item and criticise it in isolation but when you take it into account with the full offering it doesn’t seem that much of a deal breaker for me.
Also worth mentioning that may not be the right bank for everyone. And I don’t think they are trying to be.
Edit: I am not saying I wouldn’t prefer a higher buffer amount or a higher limit before fees kick in. I am saying I can live with the offering as it stands.
I think I have mentioned before that I would happily pay a monthly fee for a smart and quality bank account. So should I end up paying £15.50 a month I think it would still be money we’ll spent supporting monzo and allowing my temporary lending.
Still waiting for a Current Account invite , but you’ve lost me at the word “feels”. Attitudes to, and experience of, debt shouldn’t be led by emotion.
Interesting to learn that 50p / day and 1p / £10 / day were tied in internal polling. One is a fee, the other much closer to resembling an interest rate - which for short term debt, is more appropriate.
For all the noise above about APR, this isn’t the standard metric used for comparing overdrafts. Instead, banks use EAR which ignores fees and only takes interest into account. Arguably this is why we’ve ended up with a sneaky bank culture of loading overdraft product T&Cs with various types of fees. Because banks don’t tend to share a tally or forecast with you keeping track of what you owe throughout the month, people often end up with a nasty surprise. The different fee structures used by different banks (particularly for unauthorised overdrafts) also make it hard to compare different banks tariffs, and so inhibit competition and switching.
This is why I don’t like this first overdraft attempt by Monzo. I struggle with the concept of an overdraft charging structure which means I pay the same whether I borrow £20.01 or £1000. It encourages people to borrow more, because it costs the same regardless, which is irresponsible.
Debt should always be thought of in terms of three elements: how much, for how long, and at what cost. Taking the first out of the equation sets a poor precedent.
Monzo has made a solid start, building a reputation for presenting financial information in an engaging and educational way, and encouraging people to be responsible with their money.
It had the opportunity to build further on this reputation for transparency and financial literacy by choosing a fair and informative approach to overdrafts. It’s relatively easy for Monzo to keep a tally of overdraft charges and to forecast expectations (if you can do it with my credit balance, surely you can do the same with my debit balance too) based on a clear interest rate. Monzo could also use this first chargeable product as an opportunity to educate people further about debt, the cost of borrowing and help drive (no doubt favourable) comparisons.
Instead, in its first opportunity to earn revenue from its customers, Monzo appears to have erred on the side of what’s easy, and at a price level above bank average rates^, which is disappointing.
^ There’s a BIG difference between what banks charge for authorised, vs UNauthorised, overdrafts. Much of the price comparison with Monzo’s first attempt discussed above is in reference to UNauthorised bank overdrafts. Most banks won’t charge you a fee for an authorised overdraft, and their interest rates are nearly all sub 20% pa if you operate within that limit.
You’re only going to get as low to that with Monzo if you are accepted for (ie authorised), and borrow, a full £1000 given the 50p / day fee - which works out at 18.5% on an annual basis. So most people are going to be better off with an authorised bank overdraft, than an authorised Monzo overdraft.
Extremely well put and echoes my thoughts on this pretty much exactly!
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.
I don’t see the problem here?
It won’t necassaily promote people to take huge credit lines - really, your credit score should dictate the maximum credit limit you can have.
If I can say “it’s gonna cost me £3 to have an overdraft until payday” that really helps with planning and means I wouldn’t be tempted to not pay say my electricity bill on time, or not put the heating on when it’s -5°C outside. Because I know I’ll be paying it back and when, I know exactly how much I’m spending on convenient credit.
That’s where we disagree I guess. Most people think emotionally about their money. Giving them behavioural tools to stay in control can be more important than simply being the cheapest.
Many banks are moving away from interest rates and towards a daily feel model because customers generally prefer it. Barclays charges 75p per day up to £1000. They then still add a load of extra charges in addition to that.
No argument with those two desires. But I don’t believe a fixed daily fee regardless of balance is the right way to do that.
By having a fixed fee there is no financial penalty to stop you borrowing more. That’s not control in my mind. It means you’re morely likely to have a passive, rather than active, relationship with your money.
Clarity over how much you have paid and will pay - the app can deliver that by forecasting what you’re likely to pay based on your data. You could check (or be reminded of) this as often as you like, regardless of how the overdraft cost is formulated.
My biggest issue with 50p / day isn’t the transparency over the cost, it’s the lack of transparency into the price (ie %) for comparison purposes. There is evidence to suggest that expressing the price of debt in this way means people underestimate the percentage - this is why APR and EAR are a mandatory requirement across most consumer debt products.
“[W]hen an interest rate is not disclosed, most consumers substantially underestimate it using information from the monthly repayment, loan principal and maturity. This ‘fuzzy math’ or ‘payment/interest bias’ helps explain why lenders shroud rates… even under the threat of fines and litigation… The results link a cognitive bias to firm strategy and market outcomes, show that mandated disclosure can attenuate those links, and highlight the importance of enforcement costs.”
Clearly this is a divisive topic. Perhaps Monzo should offer the choice: 50p per day or an equivalent flat interest rate calculating interest daily and charging monthly.
You’ve lost me there I’m afraid. If users can see the cost, then why does the % matter?
Since, as Tom’s pointed out, the bank’s are moving to a flat fee structure & away from interest, it should soon be easy to compare these fees.
I’m surprised you’ve taken the easy way out & asked for options here already! You must have seen how much complexity that causes..
Because most people don’t do the mental maths and recognise that 50p a day on £20.01 is equivalent to >900%.
In my opinion, what’s important is that they can see exactly how much their borrowing will cost them & make an informed decision about whether that borrowing is affordable for them or not.
An APR or AER might help me compare different providers & see the cheapest option (before all those unexpected punitive fees anyway ) but it’s never helped me understand how much my borrowing will actually cost me.
As I think I said above, I’m in two minds. But this is as a 48 yr old who’s been lucky enough never to need an overdraft in 30 years of adult banking (except for one calculation error on one day).
The more I’m reading here, the more the ‘fixed fee’ appeals for clarity of charges. The fact that the app will give a price until payday (or whenever) is brilliantly clear and that is something I simply can’t argue with.
The level of borrowing still concerns me, however. A customer could maybe pay £30 back next month but it would take them a lot longer to repay £1000 yet they pay the same (per day) for both levels of borrowing. They pay more because they will borrow for longer, but is that clear enough?
Perhaps what I’m looking for here is something along the lines of the app telling them how many months (pay periods?) it would take to repay the overdraft at their usual rate of expenditure. Something a bank should be able to calculate.
e.g. Your overdraft of £1000 will cost you £5 for the remainder of the month but based on your average spending it will take you another 5 months to pay it off in full which will cost a further £75.
That gives an indication of total cost and leads to a better informed choice, hopefully.
For what it’s worth, I’m against the idea of Monzo being too ‘cheap’ or ‘easy’ for overdrafts if only because I believe that part of encouraging responsible financial management is discouraging unplanned borrowing. In this sense, the flat fee for a £1000 bracket actually works well since it penalises lower borrowing values which (simplistically) may serve to encourage a better mindset leading to a lower probability of higher borrowing later on. Displaying an APR/EAR would help to reinforce that, I suppose, but I’m cynical as to how much compound interest is understood out in the real world in 2017.
I hope all of that makes some sort of sense…
That’s a good point & a solution like that sounds like it would be helpful for me.
Back in April I wrote a quick comparison of the banks overdrafts, so here’s the updated version that hopefully includes future changes. As before, based on the standard account so it ignores potential higher fee-free amounts if you pay for Premier/Platinum etc.
Some deadlines have been set earlier, some have made no changes, some are moving to the x pence model, some have lowered the buffer… It’s still a mess to compare unless you know a) how much and b) how long and c) have a calculator.
Thanks @garete that’s really interesting to see. NW/RBS still operate the % model AFAIK.
Thanks for sharing more views @tom - I guess I’m more cynical of those banks that have moved to the pence / day model - this strikes me as a way to obsfucate the % cost, make comparison harder and maximise profits, rather than to help their customers.
Only after going through the calculator am I told “19.89% EAR (variable) and a monthly Arranged Overdraft Usage Fee of £6”. Same cap and, after Googling to get the hidden FAQ page: also the same buffer £10.
I’ve thought this through so more so I’ll pick up on this point too.
The flat rate doesn’t penalise users borrowing more but that’s not the same as encouraging or incentivising users to borrow more.
Instead of trying to put users off borrowing more than they can afford to quickly repay (since this is a short term loan, after all ), I think that Monzo shouldn’t lend users more than they can afford to pay back quickly.
Banks that charge fees based on interest / tiered pricing can’t (or at least, probably wouldn’t want to) adopt that approach because it would reduce their profits. But since Monzo is using this flat pricing model, they can. That also aligns well with Monzo’s aim to keep their balance sheet small.
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.