Why bank fees need to be regulated

By Felix Salmon
July 2, 2009
write a blog entry advocating more and/or better regulation, the laissez-faire types, like Vincent Fernando, have a tendency to come out of the woodwork:

I believe we need to keep holding people responsible for their decisions and personal management...

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Whenever I write a blog entry advocating more and/or better regulation, the laissez-faire types, like Vincent Fernando, have a tendency to come out of the woodwork:

I believe we need to keep holding people responsible for their decisions and personal management…

While overdraft fees are quite high, at the same time they are usually easy to see once they hit you. I’ve been hit by them in the past, I got burned, and I became double vigilant not to get burned again. If someone is hard up for cash, there are better ways to get short term loans, actually a credit card, though expensive, is probably cheaper than overdraft using the numbers Mr. Salmon mentioned. I doubt the majority of people who pay frequent overdraft fees don’t have an alternative method to manage their cash, or aren’t able to see these fees by checking their statements. If they managed a budget they would notice some money missing. As seen with credit cards, some people just need to manage themselves better…

Note that the normative modal verbs here: I wrote that the banks “should be stopped”. In response, Fernando says that “we need to keep holding people responsible” and that “some people just need to manage themselves better”. But here’s the difference: stopping banks is, conceptually, possible. But the $38 billion in annual overdraft fees are clear proof that Fernando’s “people” just aren’t going to magically start managing their finances in an optimal manner.

Empirically speaking, it’s clear that the 20% of checking account holders who pay, on average, $1,374 in annual overdraft fees apiece are precisely the people least able to afford them. They’re probably also the 20% of people who, for whatever reason, find it very difficult to manage their personal finances. Not everybody is as numerate and sophisticated as Vincent Fernando — a lot of people can’t even manage simple addition and subtraction. Is it fair for the highly-sophisticated and numerate executives at international banking giants like Bank of America to take advantage of that financial illiteracy in order to line their own pockets with multi-million-dollar paychecks? Or should people be able to trust their banks implicitly?

The fact is that we don’t live in a world or a country where everybody with a checking account has the ability to critically check their statement and see what’s going on. In many cases, including the one detailed today by Karen Blumenthal, that’s because the bank clients concerned are elderly or otherwise vulnerable. Truth be told, I don’t spend all that much time checking my bank statement myself, and I certainly don’t “balance my checkbook” — the rather anachronistic term of art for keeping an independent record of your income and expenditure and therefore how much money you’re supposed to have in the bank.

It seems to me that we’ve tried Fernando’s solution — trying to exhort people to work this stuff out on their own, and to keep one step ahead of the predatory banks — and it has clearly failed. So now we go to Plan B, which is regulate the banks directly. Since they’re clearly incapable of keeping their fees under any kind of control.


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Well, as I said in response to your other post, it doesn’t even necessarily matter if you DO scrupulously check your checking account. In the example I gave, my account was perfectly balanced at all times yet I managed to incur a $400 charge through no fault of my own that was impossible to remove without going to court.

Posted by Kevin | Report as abusive

The subtext to the objections is that if you’re poor or a young graduate struggling to start a career, if you’re trying to raise a family and make ends meet, then it’s your fault. This makes those who have a cushion, who are more established in their careers, who haven’t had medical emergencies drain their savings, who haven’t grown up abused by alcoholics, etc. feel better because then you can say: I’m better than you. I’m the adult. I can make sure my checking account doesn’t go into the red. I’m better than you. And it’s your fault you have problems.

Posted by jonathan | Report as abusive

One way to avoid overdrafts is just to keep an extra $1000 or so in your checking account.

Of course, that essentially acts as a $1000 interest-free loan to the bank, and many people have more important uses for the money.

Posted by Jon H | Report as abusive

I guess the real question is: how much do banks lose to bankruptcy as some accounts default on the freely given overdrafts? Surely this is the only leg they have to stand on?

Posted by NE1 | Report as abusive

Rather than making stuff up about what people’s motivations might possibly be, is there some way to find out more about why people run up such large fees?

Posted by Brian | Report as abusive

Felix: Speaking of Banking NONSENSE, and them only looking out for them selves, please read my letter to Citibank informing them how they are stealing money from my mother. Can you help direct me to how and go about distributing this story as widely as possible…I would like Citibank and all banks to stop doing things like this!:

Gary Chaffee DDS
520 Bella Drive
Newbury Park, CA 91320

Citibank and
Citibank Data System
100 Citibank Drive
San Antonio, TX 78245-3214
July 2, 2009

Dear Citibank:
This letter is regarding account 40017661154. However, I hope that someone there at Citibank, someone with at least a shred of humanness, someone with a bit of heart, may also realize that this account number is connected to another human. That person is my mother—Her name is Shirley Chaffee—and on August 5, this year she will turn 85. This account was set up for her several years ago when she could no longer care completely for herself—when she had to take up residence in a nursing home. She has Multiple Sclerosis. It is a disease that she has been fighting a losing battle with now for 30+ years. She is completely bed-ridden, and needs assistance for just about everything. She can still move her right arm and hand—but barely, and that is about all.

Her social security check was being directly deposited into this account, then a day or two later, I had it set up to be automatically transferred to the nursing home that takes care of her. This was my mother’s only source of money to pay for her nursing home care. Then, on two occaisions in June (2009) (This past month) Citibank electronically reached into my mother’s account and took out a total of about $1,600.
I said “took out”, but I truly believe Citibank “STOLE” this money from my mother!

I do acknowledge that I have some business loans with Citibank, and that I have fallen behind on the payments…but that should be a totally separate issue, between me and Citibank—and it should have nothing whatsoever to do with my mother, nor with her account! Note also that I had paid back a very substantial portion of the loans with Citibank, and I told them in advance, due to the economic downturn, that I was going to begin to have trouble making the payments. I notified Citibank in writing about this in a “Letter of Hardship”—and Citibanks’ response was one of: “There is nothing we can do.”

I have continued to make attempts to renegotiate the terms of these loans…all to no avail.
I have other creditors that have loaned me money for the development of my business…and they all—except Citibank—have renegotiated new terms with me. For example: I owed $105,000. Originally to Bank of America, and had paid it down to just under $50,000….when the downturn hit. I was paying them back at a rate of $1,600. per month…They worked with us (me and my wife) to restructure the payments and the interest rate to $205./month for 12 months, then $599. for the next several years until it is paid off. Well, that has given us some breathing room.

Now that Citibank has STOLEN from my mother’s account, we have to figure out a way to come up with the missing money to personally pay for my mother’s nursing home charges that did not get paid in June! This has put an additional stress on my wife and our household.

For Citibank to have done this at all is despicable, and deplorable, and I feel it is criminal! Stealing from an elderly lady—in a nursing home—How low! I understand that since I owe Citibank for the loans, and since my name is also on my mother’s account—along with my social security number—that Citibank has the “Legal Right” to take money from this account. But I maintain that for Citibank to knowingly do so is morally wrong and ethically illegal! Especially, since I have been in contact with Citibank about trying to renegotiate the terms of repaying the loans.

We have begun telling this story to all our friends, collegues, and patients in the community…nobody can believe the a bank would be so heartless…then we spoke with an attorney about it, and he told us that in banking circles Citibank is know for its non-caring, ruthless, business only—nothing-else-matters ways.

This letter may have no effect at all on the recipients—or perhaps it will. Time will tell. The ball is certainly in Citibank’s court now…and you know what? I think I will begin to circulate this letter as much as possible…maybe it can have some effect after all. Let’s see if it does.

Very Sincerely,

Gary Chaffee DDS

PS: We have closed my mother’s account as of July 1, 2009. This is to prevent Citibank from taking any more money from my mother.

PPS: Citibank did this once before, several months ago, and a “do not touch” note was placed on the account by on of the tellers at our local Citibank branch…Well, as you can see, Citibank did it again anyway. I have closed all the other Citibank accounts that I used to have.

Sorry to hear your sad story, but let me tell you something. I’m sure the bank had all the legal right to do what they did. I work for a bank and believe me I see hundreds of people every day that cannot manage their accounts and then they always blame the bank. It’s always THE BANKS fault – it’s so pathetic!! Remember I’m just a normal person and I am also a customer of a bank. But I manage my accounts and read any terms and conditions and guess what… I have never had a problem with the bank. So wake up and smell the coffee, fot goodness sake take somne responsibility for your situation.

Posted by Joanne | Report as abusive

“I’m sure the bank had all the legal right to do what they did. ”

I’m sure they did too – they write the contracts. It’s only a matter of time before banks start writing droit de seigneur (*) into their account terms.

(* the mythical medieval right for a feudal lord to have sex with a newlywed woman before her new husband does.)

Posted by Jon Hendry | Report as abusive

The larger, conceptual, issue, is “what counts as legitimate business”?

My answer would be that “legitimate” business is that which acts to improve society, or something along those lines. (Yeah, yeah, this vague.)

My point is that there is a certain class of people, Fernando among the, who believe that legitimate business is anything, *anything*, that is not actually illegal (and if it currently illegal, but you manage to bribe the legislature to legalize it, good for you).
As long as this view of business is considered acceptable, we will have this problem, simply in ever mutating forms. The legislature may ban specific overdraft rules, but something else will take their place.

What is really needed is a social revolution that persuades the bulk of society that taking advantage of the weak, the weak-willed, the stupid, the hasty, is ALWAYS unacceptable, no different in any significant way from stealing from the blind, or having sex with young children (two other forms of taking advantage of the weak).

Will we get such a revolution? Well there was a time when having sex with the young, or with employees under your power, was accepted. So maybe.
On the other hand, it is still the case that the “trickster”, the guy who manages to pull a fast one, whether as a lawyer or riddler, whether as Tom Sawyer painting white walls, or Odysseus doing pretty much everything he did; is widely considered a hero, someone to emulate and praise. Until we get rid of this BS attitude in our society with respect to tricksters in literature and religion, I don’t think we’re going to get rid of their real life counterparts, spreading their real life misery.

Posted by Maynard Handley | Report as abusive

Felix, what reform are you proposing?

Are you thinking about (1) requiring banks to allow customers to opt-out of overdraft protection (or maybe requiring opt-in);

(2) setting maximum overdraft fees, but permitting banks to decline to provide ovedraft financing altogether; or

(3) requiring banks to provide overdraft financing to all checking customers and setting maximum rates for that financing?

It seems to me that the likely consequences would be some combination of

(a) banks declining to offer overdraft financing, which would leave people paying bounced check fees to their payees;

(b) banks reinstuting minimum balances for checking accounts; and/or

(c) banks removing interest and other benefits from checking accounts.

Those consequences might be worth it, but I’m curious which reform you think would get us the maximum benefit/cost ratio.

Posted by J Mann | Report as abusive

Geezus!!! Soemone remove that account number in Gary’s post!!!

Posted by Argel | Report as abusive

Dear Mr. Salmon,

I think this is a problem contra Fernando’s call for more responsibility. Let’s frame it a little differently.

Say a bank doesn’t cover your overdrafts and the person cannot purchase at the POS what they were going to purchase. Or the person gives a check and it bounces. The bank is acting as a clearinghouse allowing people to get by and never live within a certain limit. It could be said that ‘overdraft protection’ is just that, a racket. Mafia seem to do the same thing in poor neighborhoods; one person can’t pay, the mafia comes around and makes sure he pays, and then he is on the hook for it.

Overdraft fees of 38 billion are sucked out of the economy, and businesses gain because sales go through that otherwise wouldn’t, but it is one big lesson in free-riding. 38 billion is a lot of money to siphon off from the economy without even explicit approval from the individual bank clients. Fernando would do better to reconsider what is personal responsibility.

Posted by Richard Pointer | Report as abusive

July 2nd, 2009
10:10 pm GMT

One way to avoid overdrafts is just to keep an extra $1000 or so in your checking account.

- Posted by Jon H

Um, Jon, people dont have that extra $1000. Thats why they overdraft.

Posted by John | Report as abusive