The scandal of overdraft fees

By Felix Salmon
July 2, 2009

There’s been a lot of noise about overdraft fees of late, or NSF fees as they’re known in the industry. (It stands for non-sufficient funds.) Bank of America will now assess such things ten times a day, and the NYT’s Eric Dash has a good overview of the problem using data from Moebs Services:

The most unexpected change has occurred in overdraft fees — the industry’s most lucrative and controversial charge — where the typical fee rose to $26 after five years at $25.

The Washington Post, too, uses the Moebs data, but I’m a little bit suspicious — the chart accompanying Dash’s article shows total NSF fee income rising so steadily over the past five years that it’s hard to believe fees haven’t risen at all.

In March, by contrast, Michael Flores put out a detailed 22-page report on overdraft fees which shows them rising steadily over that period, from $27.04 in 2005 to $28.95 in 2008.

According to an FDIC study of bank overdraft programs, the median dollar amount of the transactions which triggered overdraft fees was just $36. The implicit interest rate on these “loans”, then, is in the thousands of percent.

Flores also has even scarier datapoint:

Active households (defined as the 20.2 million households with bank or credit union accounts who write the majority of NSF items) pay $1,374 in annual NSF fees.   

This is a tax on poverty, it’s substantial, and it ought to be stopped: the 20% of bank customers who pay 80% of the overdraft fees are the banks’ poorest customers.

The WSJ’s Karen Blumenthal explains what’s going on in personal terms:

When our relative began to fall behind on bills, he agreed to give power of attorney to a son, who started paying the mortgage and other big bills, as well as reducing the amount available in his dad’s checking account.

What the son didn’t count on was that the bank would automatically cover up to several hundred dollars a month of his father’s overdrafts, which essentially gave him more money to send to scammers. In addition, he was charged $33 for every overdraft—running up hundreds of dollars in fees. When the son called Sovereign Bank, his father’s longtime bank, he was told that the protection was standard and that he couldn’t turn it off.

It’s the biggest banks who are the worst offenders here, making much more money off noninterest income (ie fees) than their smaller counterparts:

fees.tiff

They should be stopped — what they’re doing is unconscionable. Whether you believe Moebs’ numbers or Flores’s, these fees account for the lion’s share of bank fee income, and are already running at well over $30 billion a year. Yes, America’s banks should be profitable. But not because of things like this.

(HT: Chittum)

23 comments

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Totally agreed, Felix, but with the breakdown of any sort of ethical compass in US business, how do you accomplish this except with pretty damn intrusive and in-evitable regulation?

Count me in for that – I think bank stocks should be pretty sleepy places…

Posted by van | Report as abusive

“What the son didn’t count on was that the bank would automatically cover up to several hundred dollars a month of his father’s overdrafts, which essentially gave him more money to send to scammers.”

Huh? He was sending money to scammers and it’s the bank’s fault?

Boo-freaking-hoo.

Posted by G.D. | Report as abusive

I think the biggest problem here is that there is very little recourse for the consumer.

When I was 22 years old (6 years ago), I bought a $400 camera from Best Buy. While I was at the checkout counter the (probably 18 year old) cashier accidentally charged my debit card twice. She reversed the charge and I went on obliviously for about 4 or 5 days using my debit card.

When I checked my bank account, my balance was around -$300 (I use my debit card for everything so there were many charges in those couple of days). I called my bank (National City) to figure out what happened and they told me that the Best Buy purchases caused me to overdraft even though there was obviously a reversal which of course did not process until several days later. I was even charged for purchases that occurred the day before the Best Buy fiasco but were not processed until afterward.

For the next two weeks I went back and forth fighting for re-imbursement from both Best Buy and National City which I NEVER RECEIVED. National City told me that they required a signed affidavit from Best Buy that the charges were a mistake and Best Buy’s management refused to do that for me.

Needless to say I am no longer a big supporter of either company.

Posted by Kevin | Report as abusive

Of course it’s unconscionable. What else do you expect from the banks?

But their lobby is large and integrity has all but disappeared in America. Nothing will change.

The banks are nothing more than loan sharks. The late payment fees on credit cards are also ridiculous, as they get to charge those fees on top of the finance charges, which also jack up the interest rates. They even charge over-the-limit fees for credit cards, even though they can deny a charge when you are over your limit. They don’t know how to efficiently run their business, so they create all of these absurd fees to mask their mistakes.

I have heard stories like Kevin’s so many times, where unauthorized charges against a checking account cause overdraft fees, and even though the charges that caused the overdrafts are reversed, the banks refuses to reverse the overdraft fees. Yet, if they sent you a check by mistake, they expect you to return it.

Posted by KenG | Report as abusive

i can see where a small charge might be warranted where the bank actually pays an overdraft. a ‘loan’ has been made and the bank incurs some risk.

but, what about charging for overdrafts that aren’t paid? $25 for rejecting a transaction? the bank incurs no risk, and the processing cost to the bank must be all of about 2 cents.

and don’t get me started about banks that sort the debits in front of the credits before nightly processing.

Posted by bob | Report as abusive

Didn’t banks get into the overdraft fee business because merchants were charging enormous sums for bounced checks?

Many (Most? All?)banks allow you to disable overdraft protection and take your chances with bounced checks. Why don’t more consumers take advantage of that ability? Or simply pay all one’s bills in cash, then you can’t do any overdrafts. I presume that’s because they like the flexibility it provides.

Credit union…Credit union…Credit union. Join your local, neighborly credit union. Heck, you might even see the CEO if it’s a smaller one.

Posted by Griff | Report as abusive

I agree 100% that banks should stop loan sharking, but that’ll never happen as long as the government continues to pump money into them so that they can hand out enormous bonuses to their so-called top people. After all, these banks have to pay for their sports arenas, advertising, etc. somehow because all their money is going to other unknown places. We don’t even know where the bailout money went, but could probably figure it out if we track CEO lifestyles. There’s a real easy way to stop these outrageous fees. Keep track of spending and don’t overdraw bank accounts. It’s not rocket science folks.

Posted by Frank | Report as abusive

also look into how banks process transactions. I know some banks will process transactions not on the order they arrive in a given day but on their size. E.g. if an account has $1K and 10 transactions come in with the highest being $1200, all the transactions will over draft rather than say the last few if they came in lowest first/time order.

I think there was some legislation to prevent this behavior, but I don’t know if it ever passed. My guess is no.

It’s all a scam.

On 6/24/09 my checking acct. overdraw $.12 (12 cents)
Bank Of The West charged me $35.00 and said no to my request
to remove it !!How much interest that i paid for 12 cents
loan for one day ?

Posted by kimt | Report as abusive

Not only is this an outrage, it is a creaky, antediluvian outrage. Wells Fargo did something similar to me within six months of my first opening an account with them in the 1980s (yes, I’m old). I fired them and moved to a credit union. 99% of money center bank depository customers should do the same.

On topic, this is yet another example of how business takes advantage of unsophisticated clients. That story is as old as time. As a classic collective-action failure, it should be regulated away. To my mind, retail banking looks just like a utility, and should be treated as same. Funny thing, despite PG&E’s bankruptcy, no utility I know has blown up the world economy yet.

Perhaps that’s all the regulatory reform we need: banks as utilities.

When I tried to leave BoA (Bank of Assholes) they refused to give me any assistance or instruction on how to do so. So, I simply wrote a check for my whole account value to my new bank. Unfortunately that large transaction from both my savings and checking accounts caused an overdraft fee.

I called up BoA, and after being bounced between their credit and savings departments for hours, they finally performed some transactions to zero out my account so that I could close it. I had printed out my account statement and was doing the math on my desk alongside the person on the phone, and I had zeroed everything out when they said that there was a $0.19 “overuse fee” or some such thing. It had clearly occurred due to the actions of the person on the phone, the BoA rep, who was moving the money around for me. I mentioned that and he refused to help until I recited the math that I had been doing on my print-out, at which point he sighed over the phone and acted like he was doing me a big favor by canceling that fee which his OWN actions had caused.

After being told my account was closed I continued to receive threatening letters in the following months telling me that I had this or that balance of negative amounts, always less than a dollar, which needed to be dealt with. I continued to call the bank and demand that my closed account be truly closed and buried, and eventually I think it worked. But it took several attempts at closing it before it finally died.

BoA was not going to let me go without a fight, that’s for sure. I am so thankful that I left though.

Posted by Erik | Report as abusive

I agree, I have seen families lose 2 weeks worth of income a month on overdraft fees, in turn making them take out pay day loans to pay rent or mortgages. It’s a scary cycle.

Posted by Tiffany | Report as abusive

Despicable, but also predictable. Those with power and influence in this country have lost their moral and ethical compass (assuming they ever had one). Greed is a virtue to them, and the masses are indoctrinated into thinking that’s okay because Free Markets are Good.

Posted by Argel | Report as abusive

DON’T PAY YOUR FEES.

IF YOU HAVE A CREDIT CARD, MAX IT OUT, THEN JUST DON’T EVER PAY THEM BACK. IF ENOUGH PEOPLE DO IT, THERE IS NOTHING THEY CAN DO ABOUT IT.

Posted by Wendy | Report as abusive

It’s just not the poor being victimized by these fees, it’s all sorts of people. Years ago I witnessed large numbers of young soldiers in the military living paycheck to paycheck because of these fees. Many would eventually have to go to an agency such as AER (Army Emergency Relief) and get a loan to dig their way out of the mess.

We missed out opportunity to shut these crooks down and start over when we gave out the bailout money.

Posted by Bill | Report as abusive

Oh, please. Stop whining and move your account to a consumer-friendly coop…the awesome Credit Unions. They work for you, not share holders, they are updating to include global ATM access, they will be responsive.

Posted by Ian | Report as abusive

Join this class action lawsuit against Wachovia Bank, N.A.

Read the FDIC report issued on November 2008 that uncovers a “re-sequencing scheme” Wachovia and other banks implemented to rob consumers of their money through overdraft fees:

http://www.badisse.com/?p=82

THE TRUTH ABOUT BANK OVERDRAFT FEES (The Scam)

I am going to make this short and simple. The bank scam to increase overdraft fees works like this:

Scam Ingredience:

(1) Delay posting account balances

(2) Delay posting charges

(3) Re-sequence and pay charges from high to low

THE OVERDRAFT SCAM:

Bank Balance = $100

If you went into overdraft on a single charge and the bank paid the charges in order by DATE (Day#1 then Day#2 charges) even if it re-sequenced them from high to low, you would only pay one single overdraft fee of $35. But by delaying the postings they can batch them together on a single day and then re-sequence them to increase the $35 overdraft fee to $105.

OVERDRAFT FEE $35:

Charges Day#1: $10 + $10 + $5 = $25 (account balance = $75)
Charges Day#2: $65 + $35 = -25 (You only pay one overdraft fee on the $35 overdraft)

OVERDRAFT FEE (by delayed charge postings) $105:

Batched Charges Day#2: $65 + $35 + $10 $10 + $5 = $125 charges (3 overdraft fees = $105)

The delay in posting an account balance is to throw the consumer off in believing they have enough money in their account so they can go into overdarft. Novice consumers don’t understand that the problem is in how the bank is creating the multiple overdrafts from a single overdraft. So, when the bank tells the consumer “it’s your fault for not watching your balance”, the consumer thinks they are at fault because they are at fault for the initial overdraft; but the consumer doesn’t understand how the bank creates the additional overdrafts. Thus, the scam.

Read More at http://www.Badisse.com

David Mehmet has it exactly right. Fifth Third Bank came in and bought out our small First Charter Bank in Charlotte, NC. Suddenly, I had no more free overdraft protection. Recently, I overdrew my account by $83, with the last check posted bein $299, which should have cost me $37. Instead, the bank paid the $299 first and bounced enough small items that the fee was $148, which I did not learn about for three days, the delayed posting time on the online statement! By then I had inadvertently overdrawn the account another $42. This time they were able to bilk another $185 from it in small items. I made a couple of emergency deposits and got home in time to pull up the statement, which again was overdrawn for $19, for which they charged me another $74. All total, thish 5 day series of incidents cost me $407, my grocery money for 2 weeks. Additionally, I had tied my overdrafts to my credit card, only to learn after-the-fact that the bank will only transfer money from the card to the checking account if you owe less that 50% of your card’s credit limit! Without real regulation, there’s no way the consumer can win.

Posted by Marilyn Cirulis | Report as abusive

The tragedy that it is too easy for all of us to feel shame and thus be afraid to stand up and be counted about the problem. It is truly ridiculous that with debit cards and such a couple of 3 dollar lattes with one actual overdraft can cost you $70!!!! So it is no wonder banks hand out debit cards like candy, since they count as bounced checks for EACH transaction. Since we are too ashamed to admit to bouncing checks, no one stands up to the ridiculous problem. How about a limit that the check charge of $35 only counts ONCE for at LEAST $35 of overdraft if they are going to exploit the PER CHECK charge this way!!!!

Posted by Daniel | Report as abusive

I recently became a victim of overdraft fees. A whopping $400.00 worth, even though I have overdraft protection. I’ve researched the issue at length, confronted bank officials and compiled a report. I intend to file a claim against Regions Bank in Small Claims court. Nowhere in their on-line documentation could I find the exact amount of their fees, nor did I get any satisfaction from their employees. In fact, the employees spent considerable time on the phone with their back office departments trying to get answeres to my questions. They couldn’t. They went on a screen they jokeingly call the “dark side”, (I don’t consider my money or my transactions a joke)their on-line interface to my account(s) and it doesn’t show the same information I see on-line. It comes down to really bad customer service. Why, because they are allowed to get away with it. I don’t have extra money to support the bank. It seems the government is doing a good job of that.

Posted by Linda | Report as abusive