Inform consumers better about overdraft fees

Banks must inform consumers better about the annual fees they have to pay for their bank accounts, including overdraft fees. The Netherlands Authority for Consumers & Markets (ACM) has issued this recommendation following the study ‘Overdrafts on personal current accounts,’ which was conducted by research firm CEG, and which had been commissioned by ACM. The study examines whether insufficient competition between banks harms consumers with overdrawn balances.

The overdraft interest rate is a component of bank accounts. The study examines whether banks have market power, and whether they are able to charge too high interest rates and overdraft fees for consumer bank accounts. This turns out not to be the case. Compared with other countries, consumers in the Netherlands pay relatively low charges for their bank accounts, including overdraft facilities. Moreover, banks are facing competition from a large number of companies that offer consumer credit, which is considered an alternative to overdraft facilities.

ACM sees no need to tighten the existing rules concerning the caps on overdraft fees. In fact, this could even have unwanted effects. Lower caps on overdraft interest rates, for example, could result in banks shutting out consumers with regularly overdrawn balances. These consumers might then turn to undesirable and even more expensive alternatives. Moreover, lower caps could lead to a situation where consumers end up paying more for other components of their bank accounts.

However, ACM does see opportunities for improved protection of consumers with regularly overdrawn balances. ACM believes that banks must inform consumers better about the total annual costs they pay for their bank accounts, including overdraft fees. This will make consumers more cost-conscious and less vulnerable to financial setbacks. Overdrafts have had the attention of the Netherlands Authority for the Financial Markets (AFM) for some time now, and AFM can now also take into consideration ACM’s recommendation in its strategy.