Why do ‘unauthorised’ overdrafts exist?

A landmark court ruling last week is set to “open the payout floodgates”. Or so says the Daily Mail

The gist of the story is simple: Oliver Foster-Burnell went over his overdraft limit. As a result, he was charged more than £700 in charges and penalties. He wasn’t able to pay those charges. The result was a “spiral of debt that crippled his finances”.

The court has ordered his bank to pay him back the £743 plus interest, and Mr Foster-Burnell has made a statement to the effect that “it is unfair the banking industry is allowed to profit while people suffer financial hardship. By applying these charges, and allowing them to snowball out of control, it skews the imbalance.”

Fair enough. But here’s the real question: why does anyone have an unauthorised overdraft anyway?

The key surely is in the name – unauthorised. If a bank hasn’t authorised a loan to someone, why would they pay it out? After all, it isn’t consumers who hold the cards here, it is the banks. They don’t have to pay out beyond a previously agreed overdraft limit – if they do, it is their choice. You could argue that if they make the choice to pay out, they effectively authorise any resulting increase in the overdraft.

So, rather than creating this rather bonkers and, to my mind, utterly artificial division between what is and isn’t authorised, it would surely be better to refuse payments beyond an agreed limit, and instead send an instant text to the account holder saying something along the lines of “We have had a request for a payment that would take your overdraft beyond the agreed limit. If the payment is urgent please contact us immediately to discuss your options.”

No more overdrafts classified as unauthorised would mean no super-high charges, no more of the situations that caused the nightmare for Foster-Burnell, and no more crappy PR (on this subject at least) for the big banks.

This seems so obvious to me that I can’t understand why it isn’t obvious to the banks. Unless, of course, they consider a reputation for untrustworthiness, regular hostile court judgements, and the enduring hatred of a subsector of their customers to be a price worth paying for the maintenance of short-term outsized profits. 


  • Tony Hart

    Exactly; what are banks up to??? Also, why do they lend money to private equity firms? These businesses should be forced to get all their capital from investors or corporate loans.

    That would make a huge difference.

  • Chris Clark

    In my view unauthorised overdrafts exist because they are very profitable for the bank to the detriment of the bank customer, and for no other reason including PR.

    To give one example, banks are extremely willing to allow Wonga and co to use their direct debit system because they know there are frequent payment failures, and every failure is a £30 unauthorised charge.

    In America there are rising assertions that banks actively seek partnerships with payday loan organisations for this reason. Impaired finance pays.

    It is also next to impossible to get either a debit of credit card from a bank that either pays and charges, or declines and charges anyway. The solution is to use pay as you go money wallet systems from Tuxedo, Neteller (Optimal Payments), and others – when it’s gone, the next one doesn’t happen – and you get a text anyway.

  • Keith Jones

    Money Week Digital Format.

    This request has absolutely nothing to do with unauthorised overdrafts, but as
    there is nowhere on the Money Week website where I can post general feedback,
    this will have to suffice. There are many indicated E-Mail links, but none seem to
    work. So now on to my question.

    Would it be possible to have two formats of Money Week on the web site? One
    would be as current to keep whoever decided the format happy, the other for
    people like myself who enjoy reading the printed magazine, but find the on line
    version awful.

    The printed version has a nice flow and is full of up to date articles, whereas the
    online version a garbled, mainly out of date and a great deal of navigation
    required. What is the point of saying ‘read Money Week on line’ when it is nothing
    like the printed version?

    Thank you.

    • Moderator

      Keith,

      We have a digital version of the magazine available to subscribers, which replicates the page structure of the printed mag.

      Log in, go here, http://reader.moneyweek.com/ and enter your subscriber number.

      Or you could download the PDF.