Overdrafts have long been a major source of profit for banks. In 2017, banks made £2.7 billion from overdraft charges.
Overdraft charges are confusing. Some banks impose daily fees, some monthly fees, some charge interest, some use a combination of fees and interest. As a result, it's very hard to compare or work out the cost of borrowing.
Unarranged or unauthorised overdrafts can be hideously expensive. The Financial Conduct Authority noted that the typical cost of going £100 into the red was £5 a day. That's up there with payday loan charges.
According to research by StepChange, 2.1 million people in the UK go into overdraft every month of the year. The average overdraft debt among people seen by StepChange is £1722. Repayment of such debts swallows up income and leaves little for everyday essentials.
We want to challenge the way banks make money. We took inspiration from modern businesses that don't operate in financial services, like Netflix and Spotify. They make money by charging a subscription fee.
We replicated this with SteadyPay because we believe it's a transparent way of doing business. Unlike overdrafts, you don't have to comb through the fine print to uncover charges – because there's nothing hidden.
It's also a simple way of doing business. You don’t have to get out the calculator to work out the total cost – it's the subscription fee and whatever top-ups you borrow, nothing more.
Ultimately, it's a responsible way of doing business. Because we don't charge interest, we have no incentive to keep you in debt. Because we don't charge interest, you’re not at risk of falling into a debt spiral with us.
|Interest charges||Account fee||Late/missed payment fee||Exceed credit limit fee||Subscription|
Overdrafts are designed as a quick fix. This means they address a symptom of the problem ("I need money to buy this thing now!"), rather than the root cause ("Why am I short of money again?").
Our service is designed to get at the root cause and help you to get on top of your everyday finances. We do this by topping you up when you earn less than your regular level of pay.
In effect, as illustrated above, this smoothes out your pay. This in turn reduces the pressure on your bank account and helps you to avoid falling into overdraft.
It might seem strange that credit can only be accessed when you're paid below your regular level. This is because we want to support your efforts to budget for everyday essentials, not enable impulse buying. In other words, we’re there for when you need us rather than for when you want us.
|Cost||Subscription fee||Interest charges, penalty fees, refused payment fees, account fees|
|Terms||Transparent, simple||Hidden, confusing|
|Outcome||Avoid high cost debt, budget control. Protects pay, helping customers to stay on top of their bank balance and avoid overdraft.||Accumulate high cost debt, budget disruption. High levels of charges, especially for unarranged overdrafts. Repeat use of overdrafts puts customers at risk of debt spiralling due to a build-up of charges.|