The scandal of overdraft fees
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:
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.