People don’t calculate overdraft fees, they attempt to eyeball them and often just give up in confusion and accept the bank’s selling points. Since this is a game of perception, I think Monzo could easily win by tweaking their formula, charging similar amounts but crucially selling it in a different way. For an example of how other banks are selling their overdraft, see starling:
If Monzo were in that comparison, they’d come out poorly, for example £100 for 30 days would be 15.50, compared to £1.18 for Starling and similar amounts for other banks. For some people who currently live on very low budgets that matters, for others earning more they don’t really care about the charges and will avoid overdraft easily.
The aims should be:
- Discourage habitual overdrafts
- Don’t penalise people who live near 0 in their account and accidentally go under 0 for a day or two (students)
- No punitive fines as in some other banks
- Proportional fees rather than a flat fee (to encourage getting out of overdraft)
The selling points should be:
- Free overdraft of x (they already have this but don’t sell it as such)
- We won’t charge for errors which are quickly corrected (dipping in for 1 day)
- Low charges if you do have a longer-term small overdraft to help you get back above 0
Personally I think they should:
- Up the buffer to £50 and call it a free overdraft for everyone - this would be really appealing to lots of people, so show it as an overdraft facility (because that is what it is effectively), don’t hide it
- Have a time buffer of 1 day where you can use your overdraft for a short period with no charge (already done as alexs notes)
- Clearly communicate charges in advance in app, so people can see what they’ll pay (already done as shown above).
- Tweak charges to make them per month and proportional - 1p per £1 per month or something incredibly simple like that. No percentages, but proportional to debt so that clearing debt is rewarded.
So you’d have 50 free, then if you’re in debt of 150 for 10 days in a month, you get charged £1, which is still lower than many competitors.
At present the charges penalise those who can afford it least by being a high flat rate per day. Part of the paradox here is that students are low value while they are students but are likely to be the highest value customers in the long term, and they care about overdrafts more than anyone else.