Overdraft fees charged by high street banks can cost up to seven times more than payday loan lenders are allowed to charge, according new research.
Urgent action is needed to tackle the “sky-high” unarranged fees, consumer group Which? said as it published its findings on Wednesday.
It compared the cost of borrowing £100 for 30 days in an unarranged overdraft across 16 high street banks with borrowing the same for the same amount of time through a payday loan.
It said overall, 13 of the banks investigated charged more than a payday loan company, and some charged considerably more, with the most being seven times more expensive.
The Financial Conduct Authority (FCA) previously capped payday loan charges, meaning that the cost of a loan in our scenario would be £24.
The FCA has been looking into the high-cost credit market generally and is due to release its findings in a review next week.
Which? said that, along with 84 MPs, it is demanding the FCA takes urgent action to "end this unfair practice" by restricting unarranged overdraft charges to the same level as arranged overdrafts.
Gareth Shaw, Which? money expert, said: "It's alarming that the majority of banks are still allowed to charge more than payday loan firms through these rip-off overdraft fees. These extortionate fees can cost thousands of pounds a year, hitting those who can afford it the least.
"The regulator cannot drag its heels any longer. We must see urgent action to restrict these charges, bringing them into line with arranged overdraft fees to finally end this unfair practice."
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A spokesman for trade association UK Finance said: "The industry is committed to helping customers with their everyday banking and an overdraft can be a short-term solution to smooth cashflow.
"An unarranged overdraft might arise where customers have miscalculated their finances, although we would always encourage them to contact their bank to arrange an overdraft and minimise costs.
"Text alerts can help customers take action if they are going overdrawn and lenders are working on a series of measures to help those who regularly use their overdraft."
An FCA spokesman said: "We are concerned about the way the overdraft market works for some people.
"Often the fees are too high and charges can be unreasonable.
"We think the market may need fundamental reform and we have questioned the role of unarranged overdrafts should play in a modern market.
"We'll set out our findings on May 31, including proposals to address some of our concerns."
The FCA spokesman said any proposed changes to overdrafts "must look at the wider banking sector to prevent harm to consumers without impacting on people who rely on overdrafts for normal, day-to-day banking".
Additional reporting from the Press Association.
