NatWest overdraft fees are eight times payday loan costs

High street banks are accused of charging excessive fees to vulnerable customers who unexpectedly run out of cash through overdraft charges that are often as much as eight times the cost of payday loans.

NatWest was the worst offender in a study carried out by Which?. The bank charges as much as £180 to customers overdrawn by £100 for 30 days.

In contrast, a cap on payday lender fees introduced by the Financial Conduct Authority (FCA) in January 2015 limits the charge on £100 borrowed over 30 days to £24.

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In response to the findings, Which? has called on the regulator to impose a similar cap on overdraft fees, which are worth £1.2bn to the sector each year, when it concludes an ongoing review into high-cost credit, says the Mirror.

Labour's former shadow work and pension secretary Rachel Reeves said during a Westminster Hall debate yesterday that the government should legislate to force the regulator's hand, as it did in 2014 on payday loans, says the Financial Times.

Overdraft charges are often calculated in relation to monthly billing periods, rather than per day, adds the FT.

In the case of NatWest, the £100 would have been borrowed over 30 days spanning two billing periods. "Lloyds Banking Group, Santander and TSB follow a similar policy, charging as much as £160 over the timeframe."

Overdraft fees have already been singled out for reform after a lengthy review of the banking sector by the Competition and Markets Authority, which recommends that banks set their own cap on overdraft fees to give customers clarity.

It also says banks should use texts alerts and other mechanisms to inform customers they are running into difficulties – and allow grace periods before charges apply.

But campaigners want more to be done and are demanding an industry-wide cap. Last November the FCA said it could still act to enforce more stringent controls.

NatWest, Lloyds and Santander have all issued statements confirming that they already offer tools, such as text alerts, for customers facing financial shortfalls – and that authorised overdrafts are significantly cheaper than unauthorised ones.

Natwest said: "We encourage all our customers to contact us if they are going to enter [an] unarranged overdraft. We offer alternatives such as putting an authorised overdraft in place, where the costs are considerably less."

Lloyds said: "Unplanned overdrafts are designed for occasional spend rather than long-term borrowing."