The thing is you’re looking at the cost of an overdraft in purely economic terms. CEO Tom firmly believes the majority of customers are emotional about their finances, not economical.
Take, for example, the evidence that most overdrafts in the UK are already more expensive than Starling, yet there isn’t a huge rush by consumers to get their overdraft charges down by switching. Nationwide charges the same 50p per day, and Starling’s own website shows most high street overdraft borrowing is charged at a higher rate even with additional charges.
Tom believes that the benefit from a fixed charge is that Monzo can, with certainty, tell folk exactly how much they will be charged if they are overdrawn for the rest of the month. It takes away the hidden cost of increased charges if an overdraft is increased, charges which cannot be predicted in advance. Tom is betting that people will respond better to a maximum fee of £15.50 per month, so they can completely take charges into account when budgeting. Tom believes the more expensive overdraft in this instance is worth paying for the confidence you won’t be charged any more.
It also means Monzo build in an ethical stance to borrowing: Because Monzo do not earn more in charges by lending you more, there is no financial incentive to keep lending, and it’s easier to work with customers to help them bring borrowing under control, using the complex and advanced budgeting features in the app, rather than just throwing more money at someone who is sinking. There may well be, as a result, less defaulting on borrowing and a higher proportion of lending at the bank is therefore profitable.
Finally, Monzo’s ultimate aim is to become the financial control centre of your life, not actually have ‘just’ a nice current account. In the brave new world of Open Banking it may well be possible to run your account through Monzo but buy an overdraft from Starling, via the Marketplace.
I used to be exactly the same, wondering why anyone would use a more expensive form of overdraft. You can find evidence of that on his very forum. Tom and Monzo have changed my opinion, quite simply.
Edit: You’ve used a ‘gut feeling’ to estimate the average level of borrowing. Elsewhere on this forum I gave evidence that the current average overdraft is in fact £1700, so it seems to me Monzo have pitched the tipping point where they become cheaper at just about the right level.