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".

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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?

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/514899/are-packaged-bank-accounts-worth-paying-for
Personal finance

Are packaged bank accounts worth paying for?

Packaged bank accounts can be very convenient, but do your sums carefully to make sure you're getting your money's worth.
17 Sep 2019
Visit/513293/the-benefits-of-sitting-tight-with-your-savings
Personal finance

The benefits of sitting tight with your savings

Agreeing to lock up your cash can boost the interest rate on your savings significantly. Ruth Jackson-Kirby reports.
20 Aug 2019
Visit/512216/switching-your-business-bank-account-made-simple
Small business

Switching your business bank account made simple

More small businesses than ever before are switching bank account, encouraged to change provider by increasing competition for their custom and moves …
7 Aug 2019
Visit/480899/the-appeal-of-the-private-bank
Bank accounts

The appeal of a private bank

Private banks have long been surrounded by an air of prestige. But is the service they provide worth the extra cost?
17 May 2019

Most Popular

Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

Th TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/investments/property/600826/living-on-a-houseboat-the-pros-and-cons-of-a-floating-home
Property

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020