UK markets closed

Monzo and Starling raise interest rates on overdrafts

Edmund Heaphy
Finance and news reporter
Challenger banks Monzo and Starling have followed mainstream competitors in reforming their overdraft offerings. Photo: Monzo

Digital challenger banks Monzo and Starling have both hiked interest rates on their overdrafts.

The decision brings the offerings of the challenger banks, which had long argued that high interest rates were unfair on cash-strapped customers, more into line with their high street peers that are also changing their rates in response to new rules.

From April 2020, some Monzo customers will have to pay overdraft fees of up to 39%. The bank currently charges a 50p fee to customers who are overdrawn by more than £20, and caps the monthly fee at £15.50.

Monzo will instead offer a credit score-based model, where customers will be offered 19%, 29%, or 39% EAR (equivalent annual rate) variable interest rates.

READ MORE: Asia and West Africa hurts Dove soap and Marmite-maker Unilever

Starling will introduce a risk-based model in which customers could be charged 15%, 25%, or 35% EAR.

The changes come after the UK’s Financial Conduct Authority (FCA) in June introduced new rules to fix what it called the “dysfunctional” overdraft market.

The FCA called on banks to remove overdraft fees and to charge a single interest rate by April 2020.

Monzo said that customers would have the option to move to the new pricing model in December or January.

“Depending on how much you use your overdraft, your cost might go up or down,” Monzo said in a blog post.

READ MORE: The true cost of Christmas for UK households

“If you only use your overdraft occasionally and pay it back quickly you’ll likely end up saving money compared with the 50p daily rate.”

Starling CEO Anne Boden said that her bank has always had a “simple, transparent and easy-to-understand approach” to overdraft pricing.

It said that it “applauded” the FCA’s decision to outlaw certain practices.

While it has introduced higher interest rates — moving away from its single flat interest rate of 15% — it will also abolish all fees and interest rates on “accidental” or unarranged overdrafts, when customers become overdrawn without planning on it.

The moves come after banks such as Nationwide, HSBC, and M&S Bank have introduced similar measures.