Metro Bank will offer a variable overdraft rate of 34% from 25 April, making it cheaper than most high street banks.
This is bad news for Metro Bank customers, as it means both arranged and unarranged overdrafts will be 19% more expensive than they are now.
However, if it prompts other banks to match Metro Bank's rate it could be good news for people who use overdrafts elsewhere.
Here, Which? looks at why Metro Bank has pitched its rates at 34%, how likely it is that other banks will match this, and what the other big banks are currently proposing to charge from April.
The regulator wanted to clamp down on the often huge and unclear cost of unauthorised overdrafts, after research showed that a tiny portion of vulnerable customers, mainly from disadvantaged areas, were bearing the brunt of overdraft costs.
Which? has long campaigned for an overdraft overhaul and has welcomed the move to make costs more transparent, to aid comparison and customer choice.
Metro Bank will now charge a variable overdraft rate of 34% EAR (equivalent annual rate - the representative interest rate you would pay if you remained overdrawn for a year).
Prior to unveiling its new overdraft rates, Metro Bank had already dropped a £10 penalty that it used to charge customers who had insufficient funds to cover payments.
Most banks have announced their new rates now, and almost all are implementing big hikes to planned overdrafts, with many doubling the previous rate.
This means that, while the cost of overdrafts will ease for more vulnerable customers, those who rely on lengthy arranged overdrafts could end up paying more.
The FCA says that occasional borrowers should be better off once the changes come in, even though the headline rate of borrowing has gone up, due to the removal of high daily or monthly fees.
But following widespread criticism that the new rates are suspiciously similar between banks, with most at around 39.9% EAR, the FCA has demanded that banks explain themselves.
The watchdog wrote to them on 28 January asking for evidence of how they arrived at this pricing.
Metro Bank was the last of the major banks to announce its new overdraft costs, doing so on 14 February - two-and-a-half weeks after the FCA's probe was launched.
At 34%, Metro Bank's rate is nearly 5% lower than what's on offer from many of its competitors.
So, could some banks rethink their rates due to pressure from the FCA?
It's unclear so far what the fallout from the investigation will be, but we might see banks dropping their rates anyway if they start losing customers. Overdraft charges are a major source of income for banks, and they won't want to lose the customers who use them most frequently.
For now, the upcoming rates range from 15% with challenger bank Starling (depending on your credit score) to a whopping 49.9% for some Bank of Scotland, Halifax and Lloyds customers.
Out of the 21 main retail banks, Metro Bank is seventh cheapest for overdrafts, almost 20% above the cheapest but nearly 16% less than the priciest.
In this table, banks have been arranged in order of the overdraft rate charged to most customers.Where rates are the same, we have taken account of any free buffer zones where no charge will be made. Beyond that, the banks are in alphabetical order.
|Bank||New overdraft rate (EAR)||Conditions|
|Starling||15%, 25% or 35% depending on credit score|
|Tesco Bank||18.9%||Monthly cap of £75|
|Monzo||19%, 29% or 39% depending on credit score|
|Ulster Bank||19.49% or 39.49% depending on account|
|Metro Bank||34% APR|
Before you move banks, it's worth finding out exactly what the different rates will mean for the pounds in your pocket.
For example, if you had a £1,000 overdraft for 10 days, Starling (15% EAR) would charge you around £3.85; Metro Bank would charge £8.12 (34% EAR) and at Nationwide (39.9%) you'd pay £9.32.
In this example for a fairly modest, short-lived overdraft, Starling's rates versus Nationwide's would save you around £5.47. But if you borrowed more money over a longer period, the differences would soon make themselves felt.