Financial concerns are almost as big a part of the coronavirus outbreak as health worries. But, shockingly, bank customers are facing record high rates for borrowing on credit cards or for arranged overdrafts. How can this possibly be reasonable or fair?
Banks were rescued at huge public expense in the last crisis, so it is not unreasonable to expect them to play their part in helping ordinary households to weather this storm. With more people at home, becoming unwell and worrying about their future, it is important to help alleviate financial stress. Barclays is currently the only bank to announce that customers with arranged overdrafts will not pay any interest from 27 March until at least the end of April.
More people are living on sick pay now than before the coronavirus crisis. They may have been temporarily laid-off, or have lost their jobs with just redundancy payments to live on. They may be waiting for benefits to begin and the self-employed may have no income at all.
The essentials of life – food, heating, basic repairs – cannot be put on hold for weeks. Without income or savings, people will inevitably have to borrow. But Bank of England figures show credit card borrowing rates are at record highs – indeed much higher than before the 2008 financial crisis.
Even as the rates they pay for their own funds from the Bank of England have fallen dramatically, banks have consistently continued to increase interest rates charged to credit card customers in recent years, boosting bank profit margins. In the current circumstances, can this really be justified?
As many shops are refusing to take cash, and credit card payments are rising, now is not the time to take advantage of this captive customer base.
If banks do not act voluntarily, I hope the government and regulators will press them to immediately reduce credit card interest rates to, say, 0.5 per cent for the next six months. Given the massive bailouts banks received during the last crisis, there must be strong grounds to expect them to help their customers in the current situation.
This is not the only financial pain being imposed on families, self-employed or small firms right now. On top of record high interest rates on credit card borrowing, banks have also dramatically increased the interest rates they charge customers for overdrafts. Despite the Bank of England’s recent bank rate reduction to a record low 0.1 per cent, banks have recently introduced new overdraft charges that vastly increase interest payments. Even for those with pre-arranged overdraft facilities, interest rates have risen to around 40 per cent a year.
These new charges are in response to Regulatory Requirements for banks to improve transparency and reduce interest rates charged for unarranged overdrafts. But this has resulted in those who borrow within pre-arranged authorised limits being penalised heavily by drastic increases in overdraft costs.
The Regulator’s recommendation that daily fees for overdrafts can no longer be used seems to have led to extortionate new rates being introduced. Consider this simplified example: a self-employed customer needs to borrow £10,000 to pay suppliers and run her household over the next few months. With the previous fees at a maximum of £3 per day, if she were able to repay the money after six months, she would face charges of around £550. With an interest rate of 40 per cent under the new system, she must pay the bank around £2,000.
At the same time, I am told by friends who previously had a free overdraft limit of up to £1,000, that the limit has been halved to £500, further increasing the costs.
I hope banks will urgently reconsider these egregious charges, to help their customers through the coronavirus crisis. I really struggle to understand how imposing eye-wateringly high interest on customers who have to dip into arranged overdrafts can be considered acceptable.
I would also hope that banks will show leniency to customers needing unarranged overdrafts. Many people will find themselves in desperate circumstances unexpectedly. Nobody was prepared for the coronavirus lockdown measures or the business dislocation that has ensued. Rather than adding additional strain on those having to borrow to pay for essential supplies or services, the banks have a chance to show compassion and recognition of how much they benefited from being bailed out at huge public expense in the last crisis – and by central bank actions in the following years.
So, I urge the banks to announce that they will abandon plans to increase arranged overdraft interest rates, ensure other customers can access borrowing at much lower rates than the 40 per cent currently proposed, and reduce credit card interest rates dramatically to play their part in the current crisis. I do hope these suggestions will find widespread support. This could help redeem the banks’ public reputation while importantly easing the financial pain at least a little for many more people through this crisis.
Ros Altmann is a life peer, political campaigner and former Pensions Minister