I am Luba and I am part of the newly formed Lending team at Monzo! We would like to make our overdrafts as transparent and convenient as you would expect them to be at Monzo! More about our approach to overdrafts here So…
…if you are an overdraft user at another bank and would like to help us shape what the experience would be like at Monzo, please come and talk to us for 30 minutes this week :mondo: We would like to learn more about how you use overdrafts and what is important to you. Please book a slot here!
Thank you to everyone who volunteered! I added a couple of slots on Friday as well! By the way Skype or phone call would work too if you cannot make it to our office. We would really love to understand how you think about overdrafts!
Thank you to everyone who made it to our office this week We collected some really interesting insights! In case you were not able to make it, but would like to help us with our testing - we have more slots available on Wednesday, Thursday and Friday next week! Book your slot here! Do join - lunch is on Monzo!
@luba I can’t make it during the day but I’m coming to the open office on the 28th. Happy to come before that and have a chat about overdrafts if that helps?
Dear Monzonauts! Thank you so much to all of you who took the time to speak to us or take the test about overdraft pricing. We collected a lot of interesting opinions and views - as always, your feedback was incredibly helpful!
So… I wanted to give you a quick update of where we are and a sneak preview of the results.
We tested several pricing options, including interest rate, fee per day, tiered fee per day, a mix of monthly fee and an interest rate. Currently the two leading options are 50p per day and 1p per £10 (calculated on the balance at the end of day) with a monthly cap for each of the options.
Those we spoke to greatly valued transparency and simplicity. Both 50p per day and 1p per £10 were chosen primarily because they make it very easy to work out how much an overdraft would cost. At traditional banks, customers often only find out how much they have to pay for their overdrafts at the very end of the month.
A lot of you noted that there isn’t a strictly cheaper option between the two because it depends on how the overdraft is used. We were also really grateful to hear that some of you are keen to switch to the Monzo current account once it is available, while also recognising that because Monzo helps you save and manage your money, you would not really mind what the price of an overdraft would be.
Although the majority of the votes were roughly divided between these two options, we will continue thinking about what would work best taking into account your feedback, other products we may launch, what would be most intuitive in our app, various compliance constraints and our revenue requirements. We are also aware that we have spoken to only a limited group of our customers, so we will continue testing and collecting feedback to find the right solution.
Stay tuned and please share any ideas or feedback!
I’m also a First Direct customer and one thing I like is that they gave me a free overdraft facility - I think the standard is £250 but they will negotiate.
I also like the free temporary overdraft they give if you go overdrawn beyond the agreed amount - they basically send a text in the morning pointing out you’ve gone over the limit, give a temporary increase and ask for the account to be back within limits by 11pm.
So would 50p per day mean you get charged the same amount regardless of whether you’re £10 overdrawn or £500 overdrawn? If that’s the case then it seems to me that the fixed charge acts as a sort of punishment for using your overdraft but once you’re into it (and unable to escape), it becomes an invitation to a free (or cheap) lunch of sorts. This isn’t a great system as it punishes those using their overdraft to a small extent but then goes on to encourage greater use of it, potentially trapping people in their debt.
Whilst some people might be keen on getting punished for using their overdrafts (so they don’t use it) I think it’s important that short-term credit is recognised for the valuable (and sometimes necessary) service that it is.
The charge for your overdraft should relate to how much you use. It doesn’t feel right to charge someone the same fee for using £10 as someone else using £500. Monzo should be charging for the service they’re providing; the amount loaned, not the actual action of loaning itself.
Perhaps a mixture of the two options would work well. I imagine it as an interest rate charged daily with a daily cap.
For example, using your figures a £100 overdraft would cost 10p at the end of the day, a £455 overdraft would cost 46p (assuming you round up), and a £600 overdraft would hit the cap and cost 50p.
I assume you are going to limit how far into an overdraft people can go?
1p per £10 is around 40%APR. That’s higher than any incumbent notwithstanding their hidden fees&charges which are not easily comparable. Why so high at the start? Why not go in much leaner than incumbents then get fat later - like amazon, uber etc? 1p per £50 (~9%APR) would almost instantly win the internet / banking and get you your 1million customers in a heartbeat. 1p per £10 is as transparent as you like but organisations like MoneySavingExpert would just label you as a rip off and something for their millions of budgeting militants to beware.
In this old interview Tom gets a grilling for revealing that mondo would charge around 19% on overdrafts.
This is the kind of resistance/objection you’ll get from mass market and not the early tech adopters who will tell you they don’t mind what you charge them as long as its simple to use with great UX
(http://www.cnbc.com/2016/03/07/start-up-banks-can-they-take-on-the-big-players.html)
If you get abused for planning 19%APR overdrafts how are you gonna seriously run with 40%APR overdrafts? You could definitely occupy a niche but that wouldnt include the 1billion customers you’re planning for.
I remember watching that interview and the interveiwers certainly ripped into Tom about the rates of interest - something that needs to be thought about as @rarther says it would be easy for money savings expert and others to publicise what a (perceived) rip off this might turn into another Wonga
@DaveTMG We also plan to offer a fee-free buffer, however we are yet to work out how much it would be. We do not plan to have unauthorised overdraft and definitely will not be charging any extra fees or penalties for returned items, but I like the idea of giving a short term extension - this is definitely something we should consider offering! Thank you for the suggestion!
@tommy5dollar We recognise that this way of charging may seem unfair. In order to remedy this we will be offering a fee-free buffer (still to be determined) and a monthly cap on how much one will pay. In this way we would not penalise people who cross over into overdraft by small amounts, but also provide a very simple way of calculating how much you will pay. Thank you for your feedback - this is definitely one of concerns we have for the 50p option.
@Andy1 The individual limit will be based on a credit assessment, but initially we are likely to start with a fairly low limit for everyone in order to test and learn. We considered having a mixed model or giving customers a choice, however a lot of feedback we received was around simplicity and transparency, so a mixed option sometimes appeared a bit a confusing. But we will have a monthly cap on how much customers will pay.
@rarther@anon95680666
Yes, this does not appear to be the cheapest option in the market, however there are several things to consider. A lot of the banks who offer 19.9% also charge a £6 monthly fee. If you dip into your overdraft just for couple of days, you would be better off paying just an interest even a higher one. We plan to have a cap on monthly payments of £12-15, which means that for someone who uses overdraft heavily this option would be cheaper than in a lot of other banks. We will have 0 extra fees for unauthorised overdraft and no penalty fees on returned items, which is a large share of overdraft revenue for traditional banks. We also hope that with budgeting tools and push notifications, we will help customers to manage their money better. Considering all these points we hope that overall customers will have more control over their money and will end up paying less using Monzo.
Thank you very much for sharing your views! These options are by no means final and we will continue exploring to find a model that works both for our customers and is commercially viable for Monzo.
I appreciate that you understand my concerns but I still think the fixed amount for overdraft use is simply a bad idea.
People expect that the more they borrow, the more it costs them. Anything else simply incentivises people to get further and further into their overdrafts (as there is no additional fee). It means that a £110 overdraft (assuming you have a fee-free buffer of £100) will have an astronomical first-year APR of 130% (with a £12/month cap), whereas one of £500 will have a much lower first-year APR of 29%.
Whilst this isn’t necessarily bad for Monzo as a business per se it’s pretty ethically dubious.
I get that 50p/day fixed is simpler but it’s honestly just not a good idea. Even those who are innumerate are smart enough to work out 5p times the number of £100s they’re borrowing (especially since the app will tell them).
I’d suggest you use 5p per £100 as the initial rate (or 1p per £20). You could start at £100, giving people some leeway, and that will make it much more like the 19% that Tom initially suggested would be the overdraft rate whilst also seeing some substantial benefits of keeping it quite flat.
@luba thanks - the reason I find it useful is that I keep as little cash as possible in my current account and xfer over when needed. Sometimes the text from them is what’s needed!
What I would like is the ability to set up an automatic transfer from a higher interest account to cover the amount overdrawn
More about our approach to overdrafts here 
So…
I added a couple of slots on Friday as well! By the way Skype or phone call would work too if you cannot make it to our office. We would really love to understand how you think about overdrafts!
Book your slot 
At traditional banks, customers often only find out how much they have to pay for their overdrafts at the very end of the month.
We are also aware that we have spoken to only a limited group of our customers, so we will continue testing and collecting feedback to find the right solution.