What We Know About the Overdrafts / FAQ 💰 (open Wiki)

[alexs (Alex Sherwood)]

Now that users, who’re previewing the current accounts, have been asked to register their interest in testing the overdrafts, a lot more details have been shared about the them. So I’ve created this open Wiki (which anyone can edit), to gather all of the details in one place.

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To see what’s changed after an update to this post (when it’ll appear at the top of the new / updated topics list) click the pencil in the top right hand corner of the post.

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The pricing & fees

The current pricing

50p per day, once you’ve gone overdrawn by more than £20. That means that the most a user can pay per month is £15.50. We don’t yet know the maximum amount that users will be able to borrow.

Image from the overdrafts preview announcement blog post.

Will the £20 buffer be available if I don’t apply for an overdraft?

@tom

Everyone will get the £20 buffer for free.

Will users who want a current account have to take out an overdraft?

@tom

We’ll tell you before you go into negative balance and give you a yes/no choice to take an overdraft or not.

Is this the final pricing?

@tom

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.

@tristan

pricing is very much something we’ll be constantly reevaluating! I’d be very surprised if we had exactly the same in 3 years time — but we also won’t be changing it in the next few months.

Why was this pricing chosen?

@tom

We’ve spent about 4 or 5 months trying different options and running various user-feedback sessions, surveys and focus groups.

@tom

After the focus-groups, we went out to survey a sample of the user-base with several different pricing options. 50p/day was tied as most popular option (alongside 1p per £10 per day I believe). People overwhelmingly said they didn’t understand the APR options we gave them, which is why we haven’t gone down that path. The company internally was also pretty evenly split between 50p/day and 1p per £10 per day. It was ultimately a product decision to test 50p/day first, and I support that.

Is this the most profitable pricing for Monzo?

@tom

According to our forecasts, 50p/day was not the profit-maximising model, but it depends on what you believe the average overdraft balance will be. We’ll have data on that in a few months’ time.

What does this pricing translate into as APR?

@tom

The obvious downside of 50p/day is that it is more expensive to borrow very small amounts. There’s clearly a boundary problem - if you maintain a negative balance of -£21 continually for a year, you’d end up paying £185 in charges, or an eye-watering APR of 869%. Borrowing £1000 for the year would be 18.5% APR.

What does the average user borrow?

@alexs

7/10 people use overdraft on average each month, and average overdraft utilisation is around £700

Figures from the CMA’s 2015 retail banking financial performance report.

Will there be an unauthorised overdraft?

We’ll reject payments that would take you over your overdraft limit or into overdraft if you haven’t applied for an overdraft with us. Rejected payments won’t cost you a thing.

In the future, we’ll also notify you in advance when it looks like this might happen so you can choose ahead of time whether you’d like an overdraft or to reject payments.

There are a few cases where your account might still go overdrawn without you expecting it — most notably with delayed transactions from organisations like TfL or bills from hotels that come in late that we can’t reject (because they’re presentments — more detail here). Most of the time, these payments should fall within your £20 buffer, but if they don’t, we’ll notify you through the app and give you at least until midnight of that day to clear it. If you don’t clear it, we’ll just treat it like the normal overdraft and you’ll be charged 50p/day. This will also be reported to credit reference agencies. Long term, we’d like to make the whole process around these delayed transactions even easier and clearer!

Quotes from the overdrafts preview announcement blog post.

Credit Scores

Will applying for an overdraft affect my credit score?

We’re very keen to minimise any impact on your credit score from using Monzo. When you sign up for a current account with us, we do a “Quotation search”, more commonly known as a soft credit check. That means we can work out whether we can offer you an overdraft, but it has no affect on your credit score otherwise.

If you then take out an overdraft with us, we’ll do a full credit search and report the fact you now have an overdraft to credit reference agencies. This may affect your credit score.

Quote from the overdrafts preview announcement blog post.

Will using an overdraft affect my credit score?

@venkat

Having a Credit product like Overdraft does not impact score unless the customer has multiple limit ( active and inactive) in comparison to their income. Missing payments often have a significant impact on credit score so not paying the Overdraft or high Overdraft utilisation over a period of time may impact the credit score.

Is my borrowing reported to the Credit Reference Agencies ?

[Yes.]

@venkat

We are currently using Callcredit, over the long run we would like to share this with more agencies. All CRAs will detail the relation type (loan /overdraft etc), the limits, balances, and status of payments ( missed payments and defaults).

Borrowing long term

Are the overdrafts suitable for long term borrowing?

@tom

We expect people to dip in and out of their overdraft. If you want longer-term credit, overdrafts are not the best way of borrowing. We have a team lead by @StuartM that is responsible for identifying people in persistent overdraft debt and helping them get back to a healthy financial position.

@venkat

Lending products roughly tie to certain purposes Overdraft for short-term, Credit card for medium-term bulk purchases or just a payment vehicle and Loans for longer-term with structured payment.However not having transparent products and features means lending products may not serve the purpose they are intended for.

Overdrafts, as Tom mentions, is a short term lending product. If you have a direct-debit to pay and you are short of money you can dip into an overdraft to pay the same. However, if you buy a laptop and remain in overdraft for 3-4 months then it not the right product. If you are in overdraft all the time it is expensive and is not responsible lending.

Unforeseen circumstances

@tom

You could also lose your job, have a family member fall ill, suffer mental illness or any number of life events that disrupt Plan A. These can all result in problem debt, and we want to be here to help.

@StuartM (LinkedIn) leads the team here whose job it is to help Monzo customers in financial difficulties. He has previously worked giving debt advice in the Citizen’s Advice Bureau, followed by stints at the FCA and Financial Ombudsman’s service. You can read about some of his plans here.

Testing

Who’s able to test the overdrafts?

@finitejest

How quickly is overdraft being rolled out?

We are in the process of rolling out the overdraft to all of our eligible current account customers. We are doing this gradually, because we want to give ourselves time to test the infrastructure and make sure everything works as expected. Also we want to give ourselves time to react to your feedback and make sure we build the experience that works for everyone. So far, we have rolled out overdrafts in batches of a thousand people, at the rate of a few batches each week. We’ve done about 10 of these batches so far. These are either people who have expressed an interest in overdraft or offered to be an early tester + people who have been randomly selected from our more active current account users.

Will I know if I don’t get an overdraft?

If you’ve expressed interest in an overdraft or signed up to be an early tester, than you will receive an email later today informing you if you haven’t been offered an overdraft at this time. If you are one of the people randomly selected for the overdraft preview, then you are only notified if you are eligible for an overdraft.

Misc

Will other lending products be available?

[Yes.]

@Naji

‘Spread the Cost with Monzo’ will enable budget savvy Monzo users to spread the cost of high value items over a set number of months and fixed repayments.

Will there be student overdrafts?

@venkat

As we stand we will initially look to develop our lending capability ( overdraft process and system ) and once we start the ball moving we will like to look at student overdraft.

Managing the overdrafts in the app

Image from the overdrafts preview announcement blog post.

Have feedback? Please share it here

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Please feel free to add to this Wiki but only add information if you have a source that you can link to. If you’d like to share your opinion, post your thoughts here.

Thanks to @Frankiejr for suggesting that I create this Wiki.