Challenger bank Monzo is consulting on bringing in charges for overseas cash withdrawals, in a blow to its 400,000 customers.

The bank says the move is a result of ATM withdrawals costing them £16 per user in the last year, compared to £6 the previous year.

While Monzo claims its proposed ATM charges will be cheaper than high street banks, the changes will be unwelcome to its customers, for whom free overseas withdrawals are a major selling point.

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What is Monzo?

Launched in 2015, Monzo is a smartphone-only banking app, which provides customers with a contactless prepaid Mastercard.

Spending and top ups can be managed on its app, and ATM withdrawals (both in the UK and overseas) are free of charge.

Monzo was granted a full banking licence in April, and claims it could have a billion customers within five years time.

Get the full lowdown on how Monzo and its competitors really work in our guide on challenger and mobile banks.

Overseas ATM charges to be introduced

Monzo says it costs around from 1% (in Europe) to just over 2% (outside of Europe) to withdraw cash from an ATM – a bill that the bank currently foots itself.

With this in mind, Monzo claims these costs are making it difficult to ‘build a sustainable, viable business’.

It has confirmed, however, that any spending at the ‘point of sale’ (shops, bars, restaurants etc) will remain fee-free, as will online transactions in foreign currencies.

Free ATM withdrawals a key reason for sign-ups

The bank admits that many people sign up to Monzo because of ‘great exchange rates and fee-free ATM withdrawals abroad’ – but says a small proportion of customers are making costs spiral.

Monzo’s rationale is that 13% of its customers account for more than 85% of its total ATM costs – with many users signing up just to use the card abroad and then not keeping it when back in the UK.

Monzo consults on fee structure

Monzo has released several suggestions to its community of customers about how a new fee structure could work, and has opened the floor for alternative ideas, too. The three proposals under consultation are as follows:

1% charge for ATM withdrawals in Europe, 2% in Rest of the World

1.5% charge for ATM withdrawals anywhere outside the UK

£200 free allowance per month, 3% charge thereafter for non-UK withdrawals

What are the alternatives?

Starling Bank, another app-only challenger, charges no fees for overseas withdrawals or debit card spending. Meanwhile, Metro Bank allows you to use your card for free in Europe, but charges £1.50 for cash withdrawals outside of Europe.

There are credit cards that allow fee-free use overseas, offered by the likes of Saga, Halifax, B (part of Yorkshire/Clydesdale Bank) and Nationwide. However, if you don’t pay off your balance in full after spending, you will be charged interest.

Find out more about the best credit cards to use abroad.