Usury datapoint of the day

By Felix Salmon
April 10, 2009

overdraft.tiff

The typical overdraft fee these days is in the $35 range. And how much is borrowed when people get an overdraft? The thing is that most of the time the overdraft is inadvertent — which means that the account drops only a tiny bit below zero. In the case of debit-card transactions, the average overdraft is only $17. And as a result, as the chart above shows, if you go overdrawn as a result of a debit card transaction, you’re likely to pay $1.94 in fees for every dollar you borrow.

Other methods of payment have lower fees per dollar, but not much lower: if you go overdrawn as a result of with drawing money at an ATM, you’re likely to pay 78 cents per dollar in borrowings, while if you transfer funds electronically, you’ll pay 98 cents. If you write a check, the number is 73 cents.

This is what the likes of John Hempton are talking about when they say that banks are inherently enormously profitable, and that if we just leave them to their own devices and prevent them from paying dividends, they’re likely to become solvent again sooner rather than later, just by dint of how much money they make day in and day out from their operations.

But the question is: do we actually want to live in a country where banks lose money on stupid loans and make it up by socking the poor with exorbitant fees? (It’s not the rich who generally pay those $35 overdraft fees.) If you look at the entire global banking sector over the history of the modern world, I’m pretty sure that looking at interest income alone, it has lost an enormous amount of money in aggregate. Those losses are paid for, generally, by some combination of government bailouts and increased fees. And that’s just not a model I feel comfortable with. Hempton thinks that banks should be both boring and highly profitable; I think it’s worth asking where those profits are coming from before we start embracing that idea too ardently.

(Source: page 38 of this PDF, via Amanda Clayman)

13 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Excuse me, you think you have a right to break the contract you signed with the bank, attempt to spend other customers’ money, and then get away with it scot-free?

Posted by Ian Kemmish | Report as abusive

What ever happened to the application of Usuary Laws? There was a time (now, I believe) when in New York State,a loan agreement is crafted that includes an interest rate over and above the usury rate of 16% was (is?) considered usurious and determined either null and void or prosecuted.

In Florida, the legal rate is 12% and 18% is statutorily considered usurious. California sets the rate at 10%, and West Virginia states 6%.

Coastal states regularly enforce unfair pricing during hurricanes for bottled water.

On April 2, 2009, the United States Senate failed to pass the Sanders Amendment (811) to S.Con.Res. 13 which would have established a national usuary law. Why?

If my memory serves me correctly still, in addition to state by state prosecution, Federal RICO statutes have been used to prosecute people for serious violation of the usury statutes.

Why are banks and semi-banks exempt from what would seem to still be current law with a rich heritage, until recently, of vigorous enforcement? I doubt a pawn broker would be.

Posted by Kenneth James | Report as abusive

What happened to usury laws, as I understand it, is that the Supreme Court ruled that banks can operate across state lines and thereby escape state regulation. (States can’t regulate interstate commerce.) The usury laws were all state laws. Federal usury laws have never been made.

Posted by mc | Report as abusive

I believe, MC, your answer is unfortunately correct. After the 1978 ruling only national banks were exempt. If you banked with a bank which only did business in your state you were protected by your state’s law. But a federal law now exempts state banks as well.

The Gramm-Leach-Bliley Financial Modernization Act was passed in 1999. The law allows state chartered banks to charge interest rates equal to those charged by national banks operating in their state. Thus even if you have a credit card with First National Bank of California, which only has one branch office, you will still be charged the highest interest rate allowed by any state.

If a customer has a balance of $5000 and only pays 2% of the balance each month at an interest rate of 18% it will take 46 years and interest costs of over $13,000 to pay it off.

Deregulation was intended to create, and did create more credit choices for consumers. The removal of state-imposed interest rate limits allowed credit card companies to offer credit to customers all over the country and not just in their home state.

Now several major lenders are having problems with defaulted accounts, mainly because the interest payments on those accounts were so high.

Because of the credit collapse, the Treasury Department recently proposed new legislation that will change how credit is regulated in the country.

To return to being the Country Felix asks about, we all should more vigorously enjoin our elected representatives to deploy sensible renewed regulation, in my opinion, not defeat it as was allowed to happen with the Sanders Amendment.

Posted by Kenneth James | Report as abusive

How much money did US bank made on these fees last year?

Posted by Gaston Besanson | Report as abusive

Ian Kemmish, I see your point, but $35 is a bit too much, don’t you think? I think should be grateful for whatever business they can get. I think they should just charge people exactly the amount they went over. Besides, it’s not like the banks actually HAVE the money. They make that stuff up out of thin air (Go watch “Money as Debt” if you don’t believe me). So why can’t consumers make it up out of thin air too?

Felix your leading question is a bit ridiculous. Having been a self-inflicted victim of these fees, I will gladly pay them if it means BoA takes care of me, I get free use of their thousands of branches, and get great customer service whenever I walk in.

And as soon as I get tired of paying these fees, I am free to take my money elsewhere or better yet simply exercise better forethought.

How come that everyone thinks the customers hit with these fees are innocent victims robbed by greedy banks? They should’ve known better. These fees are always listed in T&C (one must read the small print before signing on the dotted line). The account holder should be able to estimate the remaining balance, and not use that bank card/checkbook if there’s a reasonable doubt that the balance is sufficient to cover the transaction. Better yet, don’t use debit cards at all. Credit cards provide better customer protection in case any issues arise. Oh, you don’t want to use credit cards because they have too high an interest? Solved easily – pay them every month in full, and don’t charge more than you can pay off.

Posted by Anonymous | Report as abusive

If you only have a small amount in the bank, banks want to get rid of you, not help you.
You cost them more than your worth.
High fees are intentional to either 1) make you profitable or 2) get rid of you so that’s not going to change.

The banks run the largest scam going.
When someone borrows money, it is the “promise” to “re-pay” that allows the bank to “create” the money out of thin air and give it to you.
They don’t lend money that people deposit.
That -I think- would be illegal.

Posted by Edgeguy | Report as abusive

the sanguine defense lines of the commentors supporting the banking position are far too smooth and pat to be taken at face value. Of Course it is the poorest customers that bear the brunt of the very high fees. Thank you for some big picture thinking in the face of the financial machine..

Posted by bh | Report as abusive

mr. fish; the mob couldn’t get everyone to drop all their money in vegas and the drug dealers couldn’t get but a small percentage of the populace addicted to heroin but the banks made sure everyone that possibly could, got a credit card. suddenly you couldn’t pay with a check unless you had a credit card number on it. then the semi secret interest increases. if you charge anything after this date you de facto agree to this increase. including your prior balance. the porno, drug dealing, gambling people have lots to learn. try this. close all your bank accounts and see what happens. be sure and let me know………..

Posted by jim | Report as abusive

Any way you look at it – the banks have you by the “short-curlys” …. credit cards have replaced cash and cash replaced gold. As the banks will tell you – “it’s a matter of convenience”. Do you really want to carry an extra seven or eight pounds of weight around in your pocket because you have to pay for everything with gold or silver ?? The biggest problem today is you simply can not operate without “plastic”. Try renting a car or purchasing an “e-Ticket” without plastic – it’s impossible. So, until someone comes up with a better way to pay for the goods we all need – we’re at the mercy of the banks. Only other possible solution is to have some sort of national legislation that limits tha tamount of interest that the banks can charge – which seems reasonable. But, then we’re back into the Government telling Private Business what they can and an not do – and, do we really want that ?? There is a third solution – but we’ve been taught for so many years now that “hanging horse thieves” is inhuman. Of course, maybe if we did hang a few – then the rest of the thieves would start to realize that we’re getting serious again.

Posted by J.Dawg | Report as abusive

I have yet to find a bank that doesn’t charge a late fee on credit card balances, which are also usurious. And the late fee is on top of interest charges, which can be as high as 30%. They even charge a late fee if the payment is made before the end of the billing cycle, which is what happened to me recently – the payment was credited on the most recent statement, which also showed a $35 charge (curiously, they didn’t charge any interest, although in the past they have on late payments).

The banks have proven they are incapable of running their business. I don’t like having the government run them, but I would accept rules that basically turn the banking industry into a utility, where they do little more than connect lenders/savers with borrowers, and take their cut. For the banks that don’t want to suffer this kind of regulation, they can choose not to have their deposits FDIC insured, and they can only use their depositors capital, and not borrow any money from the federal reserve, or any of its’ member banks. If they want those kinds of benefits, then they can meet the regulations that prevent them from doing stupid things and colluding with other banks to charge outrageous fees.

Posted by KenG | Report as abusive