Why do ‘unauthorised’ overdrafts exist?

For the banks, the profits made out of charges for unauthorised overdrafts far outweigh the bad publicity, says Merryn Somerset Webb.

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."

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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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.