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An Overview of the Overdrafts Market in the UK
Market Briefing, March 2007, 1356  €


Description

IntroductionOverdrafts are an important income stream for banks and a cornerstone of their current account package.
This is especially true as current accounts are not particularly profitable in themselves.
Yet overdrafts have been increasingly under regulatory and press scrutiny.
What effect will this have on banks' bottom lines and the pricing structure of overdrafts?ScopeSizes the UK overdrafts market and forecasts its growth to 2010.
Provides insight into current investigations and regulations and how these will affect lenders.
Discusses key pricing strategies on overdrafts and gives an understanding of the competitive dynamics of the market.
Incorporates primary interviews from industry experts and secondary data from a wide range of sources.HighlightsThere are a number of reasons for the growing popularity of overdrafts.
They are a natural extension to a current account and arguably the most easily available form of credit for many consumers.
Moreover, the overdraft market has benefited from increased competition in the current account market, with players offering attractive incentives.
There are four different pricing structures on overdrafts, including introductory, fixed rates (of which is most popular among banks), tiered pricing and individual price for risk.
However, ultimately, the overdrafts market is static compared to others.
While regulation on overdrafts is working towards serving the consumer better, it is likely that the end result will see banks lose a significant part of this income stream, and therefore have to change the pricing structure of both current accounts and overdrafts, which may not ultimately please the consumer.Reasons to PurchaseIn-depth analysis of where the overdrafts market is headed and how lenders can respond to the current challenges.
Evaluate any opportunities or weaknesses in your business plan regarding overdrafts.
Understand how the market is changing through Datamonitor's forecast of the overdrafts market to 2010.

Sommaire
 
DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Overdrafts are a key part of banks' current account packages 2
Overdrafts have grown strongly over the last five years 2
Overdrafts are an important income stream for banks 3
In addition, they contribute to those who switch bank accounts 3
For example, Alliance & Leicester continues to up the ante to win current account customers through its introductory offers on overdraft fees 4
Moreover, overdrafts are forecast to continue strong growth 5
But the overdrafts market is static compared to others 6
There are four main pricing models for overdrafts 6
It is suprising that individual risk-based pricing for overdrafts is not used to a greater degree 8
Prices on overdrafts do not tend to change very often 8
Such a condition can be attributed to complex nature of current accounts, but consumer apathy to switching current accounts is also to blame 10
There has been increasing scrutiny surrounding overdrafts, which will most likely have a significant effect on banks and consumers 10
First came the OFT investigation on credit card default fees 10
Now the OFT is to investigate the overdrafts market 10
A number of banks have been removing overdraft ``buffers`` and raising interest rates 11
Moreover, the investigation could have large consequences for the current account industry and consumers 11
Northern Ireland has also seen its current account and overdrafts market challenged 12
The Competition Commission found a number of significant issues with overdrafts 13
It advises that a number of remedies be applied to redress the market 13
The investigation is likely to conclude in a loss of income for banks in Northern Ireland 14
In addition, there is concern that too many consumers are using overdrafts for long-term borrowing instead of other cheaper lending products 14
APPENDIX 15
Supplementary data 15
Methodology 16
Forecasting methodology 16
Choice of economic variables 17
Model outputs 17
Bespoke scenario based forecasting 17
Definitions 17
Balances outstanding 17
CAGR 17
Consumer credit 18
Current account 18
Gross advances 18
OFT 18
Overdraft 18
Further reading 18
European consumer credit reports 18
UK consumer credit reports 19
UK consumer credit briefings 19
Forthcoming consumer credit briefings 19
Relevant links 19
Ask the analyst 20
Datamonitor consulting 21
Disclaimer 21
List of Tables
Table 1: Overdrafts gross advances and balances outstanding, 1997-2006 15
Table 2: Datamonitor's overdrafts forecasts, 2006-2011f 15
Table 3: Banks' overdraft interest rates, November 2002-November 2006 16
List of Figures
Figure 1: Overdrafts advances and balances have grown strongly, particularly over the last five years, 1997-2006 3
Figure 2: Alliance & Leicester's introductory offer on overdrafts is currently the most competitive in the market, November 2006 5
Figure 3: Datamonitor forecasts that overdrafts will continue to grow strongly, 2006-2011f 6
Figure 4: Banks use four different overdraft pricing models, November 2006 7
Figure 5: Authorized overdraft interest rates have not changed significantly over a five year period, November 2002-Novermber 2006 9
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