I think they’re a little high but it very much depends on your usage. I’m imagining the case where you dip into it just a little amount - a percentage-based approach is likely to be cheaper than fixed-per-day amount.
That said, for people who go a long way into the overdraft, it’ll work out much cheaper, and the £20 free allowance is a nice touch.
Overall, I voted for too expensive because I feel that’s possibly true of my potential usage but in truth, I think no matter that approach was used, they’d not be the best solution for everyone. And it wouldn’t prevent me from using it if needed.
I think Monzo are striking a good balance. Their aim is to try and help people be financially responsible. By making overdrafts unattractive they’re showing they’re not a good thing. This is also why I’m against special student accounts. They just breed irresponsibility.
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.
They have this already. You can use your overdraft free of charge if you pay it off the day when you go into it.
Great, though perhaps this needs to be highlighted, I missed it but did flick through the multiple screens quickly, 2 days would be even better. It would be a great selling point I think when they come to market this.
That’s the analytical viewpoint but it ignores UX - how confusing a variable fee is - we’ve discussed this more here.
This is a game of perception though, and I think Monzo loses that game with their current (clear) charges - the important market is the low end for students (which paradoxically then becomes high value customers), where Monzo comes out very badly with this fee structure - see that starling comparison.
It’s possible to be clear on charges and still keep them proportional to debt, but I think the important bit they’re failing at present on is that those who care about these charges the most are those likely to have the smallest overdrafts, to have limited flexibility (no savings), and to care whether a charge is £2 or £15 for a month.
I personally am totally fine with the charges, because I don’t intend using them much, and they are advantageous for those with more money who can easily pay off any overdraft as it will be due to mistimed payments, so they reward the rich at present, I just think tactically for Monzo they are a bit of an own goal.
Yes they’re not going to win any price comparisons. The interesting thing is they know that but they still did it.
So the question for me is whether this design will result in more users actually using the overdraft & Monzo making more revenue as a result. Plus whether the clarity builds trust which has a positive knock on effect on retention, promotion etc.
Are they thinking about the % interest that they’re paying though or whether they can afford to pay £5 in fees after payday though? I’m tempted to say the latter.
I do agree no-one thinks in %, but they do try to compare, and will accept the comparisons presented (like starlings above), where Monzo would not do well.
It’s an interesting topic, and I’m sure others have thought about it more deeply than me, but it seems to me the biggest problem with being low wage/student is the lack of control, the feeling of helplessness on money matters, the lack of savings and the lack of discretionary spending money, so having clear fees is incredibly important, but it’s also important to recognise that people can’t just reorganise their spending and magically come up with money to pay less fees by clearing their overdraft quicker. They’re going to hit an overdraft sometimes without being able to clear it, sometimes for weeks, they know that so they’ll choose the bank that looks like it has the lowest fees. 50p a day is way higher than most banks for small amounts.
IMO they need low fees for small mistakes which last a few weeks, not high fees unless they clear quickly (as at present).
That’s a key point. As Monzo says during the application process overdrafts are for short term (weeks not months) borrowing. If they need to borrow money for longer, then they need to look at alternatives.
Monzo should be out to (a) encourage good money management - which means avoiding or minimizing debt, (b) treating all equally.
However, their pricing structure encourages someone to borrow more of their limit rather than less - the opposite of good financial management.
Also the none % approach of charging a fee means those with a better credit rating who get a higher overdraft limit pay a lower interest rate than those with a lower credit rating and a smaller limit who pay a higher interest rate.
I’m going to disagree with you there. That’s a pessimistic view of people. Also bear in mind, that they’ll only able to go into overdraft for the amount that Monzo “allows them”.
I don’t think there’s many people who would equate being charged the same for a £100 overdraft as meaning they should just rinse it to £1000. That would indicate a mental health issue to me to be honest.
Mental health or not there is a vunerability issue. Some offered credit (be it credit card or overdraft) use up all their credit and get stuck there encouraging further borrowing to increase available funds. Hence such fee based charging I feel may increase the chances of this over and above normal percentage based charging.
Once you’re into your overdraft, borrowing more money is free. Borrow £1 costs me 50p a day. Borrow £500 costs me 50p a day. The only resistance barrier is at moving from a positive to negative balance.
Why wouldn’t I increase my borrowing as much as I can if it is free?