Why an Overdraft?


#1

Hey everyone, I didn’t want to tag on to the other “debates” around overdrafts, as they tend to focus on the policies more than anything.

I’ll also add, this is in no way intended to come across as arrogant or insensitive - I am genuinely curious about the following…

Why does an overdraft matter so much with banks like Monzo and Starling?

I understand there are people who live pay check to pay check, and I genuinely get the need to have a “safety net”, for those emergencies - I really see the value in an overdraft here.

But for the people who are financially secure, who utilise the savings options available to them, and generally keep a close eye on their finances… Why the need for the safety net?

I haven’t applied for an overdraft with Starling (or Monzo), I can’t ever see a situation where I would need one (If I was using it as my main account, I would never leave it low enough that an unexpected payment might not clear), and if it wasn’t my main account, I’d know how much I needed in there.

So, am I missing something here?

Your thoughts and real world examples are appreciated!


#3

Not only could it be to cover unexpected expenditure like a car or fridge breaking down, but useful extra buffer if you used your debit card for a hotel or car booking as the provisional transaction may remain on the account for some time tying up available funds. It can also be used to bridge the time between sending funds from your account in Switzerland or the Bahamas and that actually being available in your UK account for use. Your child may have an accident on holiday and you need to pay a big hospital bill. There are many times an overdraft could come in handy for those with better credit and be more appropriate and less hassle than applying for a personal loan. They are quicker as already agreed and they are easier to clear earlier than a formally structured loan with set repayment dates


#4

I completely see your points there, and perhaps I’m being naive… But those situations very much feel like they are for someone who already has plenty of money, and will likely not be using an overdraft anyway.

The question came to me due to all of the talk of overdrafts recently (both here and the Monzo forum), and I’d hazard a guess that most people don’t have bank accounts in the Bahamas or Switzerland they need to worry about :joy:


#5

I guess I’m more interested in how you’ve phrased the question.

Are you asking it in the context of those two banks, or asking it generally?


#6

The only reason I said those two, were because…

1.People generally have an interest in fintech, and possibly managing their finances anyway (certainly those on the forums).

  1. The ease of transferring from pots/goals to the main account would combat any issue with getting enough money into your main account (assuming you had it).

But I guess it applies to all banks (I only have Starling and Monzo customers to base this on though).


#7

Trouble is, much of the chat you rightly refer to was wrapped up in the mechanics of (Monzo) pots v main account, which unfortunately skewed the conversation about conventional overdraft usage. It didn’t get into the big questions about “do I need one” v “do I want one”.

For many relatively, financially secure account holders, the notion of having an overdraft is not about need, nor even any perceived likelihood that they’ll ever need it. It’s purely about “just in case”. Overdrafts have rarely, if ever, received the column inches they’ve had here and on the Monzo forum.

On both these forums, though, it’s likely that account holders actually need some sort of buffer: many are new to banking and indeed, to work, with no financial wriggle room. For many of them, I suspect, the overdraft will become less crucial as time passes.

That “safety net” is a good term. For some of our “acrobat” colleagues, its not even something they think about (because they never fall). For others, it’s crucial (and gets used regularly :grinning:).

My thoughts…


#8

I think that eruditely sums up the typical use case of many who had their overdrafts removed, as they were not using them but had got them for a rainy day, the odd unexpected expense.


#9

OK…


#10

I didn’t mean for this to continue the discussion about Monzo, more about overdrafts in general.

I’m still not sure I’m convinced of the need for one if you are financially stable - That would imply you have savings somewhere, and if you entered an overdraft, it would be because you weren’t aware of your current balances in your accounts.

Again, I might be missing something, but outside of “well, I’ve always had one”, I don’t see the point.

Again, to reiterate, I’m talking about those who have savings, and are financially secure.

I completely understand the need for other people.


#11

The need doesn’t have to be actual - it can, and often is, just perceived. The “you never know when you might need it” approach.

I don’t see that inference. Savings may be invested or in accounts with limited access. Effectively, that money is for the longer term, and as such, not available.

An overdraft can be that very flexible, short notice, “dip into and back out of” facility to cover unexpected immediate expenses. This is a common use case for :


#12

I fully understand your points, but this one here, is why I initially stated Monzo and Starling - Just because the access to the “savings accounts” is very easy.

Perhaps it’s just a different way of thinking/using money - For me, if I’ve accidentally dipped into an overdraft, or I’ve had to use one to cover an expense, I’m doing it all wrong (based on my financially situation, appreciate it isn’t the same for everyone).

I’d be interested to know how many of those who had their overdraft taken away recently (Monzo), actually “needed” it, and how many were simply showing signs of disgust due to the handling of it, rather than the actual loss of the overdraft itself.

(Again, that’s just context for me question, not a means to continue Monzos issue here).


#13

There was research that showed around 18% of people used an overdraft to live on.

For those people overdrafts are important, and when they see another bank offering a better rate, for example Starling they are going to think an overdraft is the most important thing before the rest like pots, goals etc.

Some want an overdraft just in case, but in the case of banks like Starling or Monzo that are raising funds, too many overdrafts have a negative affect on the financing rounds, an overdraft counts as a debt to a bank whether its used or not. If everyone on one day used there full overdrafts the bank has to have the funds to give them it, as its there.

If you are financially secure I don’t see why you would need an overdraft, if something big came up a simple phonecall on online application could see the money in your account in a few minutes, yes its a loan, but a loan will have more of an effect on your credit report than an overdraft that isn’t used would have.

Plus one thing people forget is, if you don’t use your overdraft for a while, then suddenly you use a lot, your utilisation of your credit on your credit report suddenly jumps, that will affect your credit score immediately, with a loan it won’t, because a loan doesn’t count as utilising your available credit.


#14

Regrettably, I think this reference interlinks the general with the particular and moves away from your original post, or at least from its title.

From this, it’s clear you have no uncertainty about how you should run your affairs. And I get that you’ve reiterated that.

Setting up a loan and all that goes with it (for some, the thought of approaching a lender - online or otherwise - could be frightening) isn’t an obvious first step. Having an overdraft, on the other hand, can be a reassuring backstop requiring no referral to anyone.

I reckon, as well, that the use cases for overdrafts would more often than not, be very different from those for loans…

Now…I’ll get my coat. :grinning::wink:


#15

I guess there is a certain intertwining with the recent Monzo situation (as that’s what prompted me to think about it) - I just didn’t want this topic to turn into a Monzo thread.

I also agree on the loan side of things - Too complex and seemingly “hard hitting”, to compare with an overdraft.

I’m not sure I’ve articulated myself very well in all of this - I’m on my phone, and the thought of having to type longer replies is frightening!

I’d like to hear from other people who consider themselves financially secure, and whether they have/want/use an overdraft (and if it’s not prying too much… what they use it for).


#16

Not sure what is so complicated about a loan, because they literally take a few minutes to arrange.

In fact when you check your credit report, you get a little button that shows you which loans you can get accepted for without it affecting your credit score. And people needing things quite often check their report first. That’s why Noddle and clearscore did so well, offer a product to those that might have needed financial advice and help.

A few years back things where different, but now it is in fact its easier to get a loan, than an overdraft for many people.

https://moneyaware.co.uk/2018/01/overdraft-debt-constantly-overdrawn/

Interesting fact from that article 2.1m people spent all of 2016 in their overdrafts.


#17

I didn’t take an overdraft, but it comes down to personal preference. Some people like a bit of a safety net. It’s just another feature that adds to Starling’s financial ecosystem (As you couldn’t really offer an overdraft via the marketplace).


#18

I think you are missing my point @daedal, which is probably due to how it worded it!

I get the need for overdrafts for some people (a lot of people).

I am not talking about these people here.

It’s the financially stable, who do not “need” an overdraft - Why take it? What’s the point?

If you get into a situation where it becomes necessary as a “safety net”, I’d argue that you weren’t financially stable in the first place.


#19

Hey @Phyntom - Good to hear your side.

As I just said in my last post, I personally feel if you need that safety net (which isn’t a bad thing at all), then you probably aren’t “financially stable/secure”

Again, that’s not a bad thing, but from the recent issues with people having their overdrafts withdrawn, and the subsequent fall out, I got the feeling that some people were indeed financially secure, and that made me wonder why they would have one in the first place.


#20

And, forgive me for being boring, but I’ll reiterate it - “because they can - just in case”.

And that’s where we must differ…you’re mixing need with want. And having an overdraft doesn’t automatically infer financial instability. Often it can mean the opposite ie, utilising the tools available.

Anyway - a jolly healthy discussion. :grinning:


#21

Haha, I get your point on it Graham, I don’t expect that to change :slight_smile:

On the need/want thing, I meant that if you “need” to go into an overdraft (due to a payment or lack of available funds), then there is a “high chance” you aren’t quite as financially secure as you’d like to be.

Yes there is a chance you’d have savings tucked away in systems which can take days to transfer (investment accounts etc), but I’d argue that you should have enough funds to cover “most” emergencies.

I appreciate there are lots of scenarios/hypotheticals here - So thank you for your input.