If payday loans can be cheaper than unarranged overdraft borrowing what does it mean for banks?

Ask people which is the more expensive way of borrowing £100 – a payday loan or going overdrawn at their bank and most would probably say the payday loan. People’s perception of payday lenders is one of high interest rates and fees. They’re seen as a prohibitively expensive option.

So it will surprise many to learn that borrowing money on an unarranged overdraft can be more costly than a payday loan, according to consumer group Which?

The charge for a £100 payday loan over 28 days has been capped at £22.40 since January 2015. Dipping into an unarranged overdraft for the same amount and period can cost up to £90.

Customers can access short-term funds more economically than that from their bank, of course. Banks point out, not unreasonably, that they offer loan services – including arranged overdrafts – that are better for customers.

This misses the point that many customers go overdrawn when they cannot get arranged borrowing or during a short-term cash flow situation. The Financial Conduct Authority introduced the cap on payday loans last year to protect these borrowers. They haven’t yet done the same to unarranged bank overdrafts.

Banks and payday lenders form part of an industry where regulations support integrity, fair competition and consumer protection. With unarranged overdrafts, are banks acting in the best interests of consumers under stress?