Why do ‘unauthorised’ overdrafts exist?

A landmark court ruling last week is set to “open the payout floodgates”. Or so says the Daily Mail. 

The gist of the story is simple: Oliver Foster-Burnell went over his overdraft limit. As a result, he was charged more than £700 in charges and penalties. He wasn’t able to pay those charges. The result was a “spiral of debt that crippled his finances”.

The court has ordered his bank to pay him back the £743 plus interest, and Mr Foster-Burnell has made a statement to the effect that “it is unfair the banking industry is allowed to profit while people suffer financial hardship. By applying these charges, and allowing them to snowball out of control, it skews the imbalance.”

Fair enough. But here’s the real question: why does anyone have an unauthorised overdraft anyway?

The key surely is in the name – unauthorised. If a bank hasn’t authorised a loan to someone, why would they pay it out? After all, it isn’t consumers who hold the cards here, it is the banks. They don’t have to pay out beyond a previously agreed overdraft limit – if they do, it is their choice. You could argue that if they make the choice to pay out, they effectively authorise any resulting increase in the overdraft.

So, rather than creating this rather bonkers and, to my mind, utterly artificial division between what is and isn’t authorised, it would surely be better to refuse payments beyond an agreed limit, and instead send an instant text to the account holder saying something along the lines of “We have had a request for a payment that would take your overdraft beyond the agreed limit. If the payment is urgent please contact us immediately to discuss your options.”

No more overdrafts classified as unauthorised would mean no super-high charges, no more of the situations that caused the nightmare for Foster-Burnell, and no more crappy PR (on this subject at least) for the big banks.

This seems so obvious to me that I can’t understand why it isn’t obvious to the banks. Unless, of course, they consider a reputation for untrustworthiness, regular hostile court judgements, and the enduring hatred of a subsector of their customers to be a price worth paying for the maintenance of short-term outsized profits. 

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