2016 could very well mark the beginning of the end for unplanned overdraft fees. This would be good news for those who fall foul of these charges but not for UK banks that earn over £1bn/yr from them.
The reason I’m forecasting this is because the advent of Open Banking legislation scheduled for 2017 means that tech inspired new services will be able to offer services directly to customers when permission is granted by customers. This opens the opportunity for services that could give customers every chance to overdraft penalties.
How would this work?
In practice this means that a service could be adopted by a customer where a buddy or few are registered to support in the event of unplanned overspending. As you go over your limit a message could be sent to the buddies who would have the option to cover the shortfall for a specific time period. The message would include their own balance in order for them to avoid going over themselves. Assuming a covering transfer is successful before the bank tallies up the balance on an account the overspend and associated penalties could be avoided. To motivate the new ecosystem small financial incentives could be offered to the buddying service providers and possibly those covering the costs too. The key hypothesis of this proposal is that these people would be willing and able to impose provide the customer with a significantly better outcome and at a fraction of the usual cost.
What impact would this have?
For the banking public hopefully this kind of service would not just reduce the financial penalties, pain and inconvenience for going overdrawn but more importantly it would help people manage their money better and avoid going overdrawn through the social pressure of not wanting to alert our assigned buddies. College students who have elected a parent as a buddy are one user case that bring this concept to life. It is possible that we will have better budgeting tools in future that help bank customers to not go overdrawn so much or so often however there has been plenty of exploration of this without impact so far. Regulation by the CMA has also proposed capping of overdraft fees but would this be necessary or as effective as buddy systems enabled by Open Banking?
For banks these changes could strike a double blow as they would not just lose significant revenue but also because customers without overdraft issues are more likely to switch. That this impact would be tempered with fewer customer switching in direct response to an unplanned overdraft penalty they deemed unfair would be of small consolation against yet another revenue stream running dry for the banks.
By Max Kalis, Independent Innovation & Fintech Consultant
