Overdraft fees revisited

By Felix Salmon
September 9, 2009
great article on bank overdraft fees back in July, but now the NYT has gotten two more journalists -- Ron Lieber and Andrew Martin -- to re-report pretty much exactly the same article, at greater length.

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What’s Eric Dash, chopped liver? He had a great article on bank overdraft fees back in July, but now the NYT has gotten two more journalists — Ron Lieber and Andrew Martin — to re-report pretty much exactly the same article, at greater length.

Still, there is some new stuff here. The main thing I learned is that there’s a big split between biggest banks in the US. On the one hand Citibank is on the side of the angels, one of the few banks which doesn’t have automatic overdraft protection on its checking accounts (if you want it, you have to ask for it). On the other hand, Bank of America and Wells Fargo are among the very worst banks, often refusing even when asked to turn overdraft protection off.

Given the large differences between banks, it’s a bit odd that the article contains no response from individual banks, just from industry groups like the Financial Services Roundtable. There’s also no debunking of this kind of thing:

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

This simply doesn’t follow: just because a bank currently has more overdraft revenues than it makes in profits does not mean it’ll fold in the event those revenues go away. Especially not at credit unions, which don’t exist to make large profits: at most of those 2,000 credit unions, overdraft revenues are probably a very small proportion of total revenues and won’t make much of a difference if legislated away.

And while back in July I said that 20% of bank customers pay 80% of the overdraft fees, in fact, according to the most recent FDIC report, it’s worse than that: the 13.9% of customers who get charged 5 or more fees per year pay a whopping 93.4% of the banks’ total fee income. And the 4.9% of customers who get hit 20 or more times per year are paying an average of $1,610 apiece in these fees. That’s money they really can’t afford.

What should be done about this? My idea is pretty simple:

  • Banks are allowed to offer automatic overdraft protection, but only if it’s free. (They can charge an annualized interest rate on the overdraft, but no set fees.)
  • If a bank wants to charge fees as well as an interest rate for overdraft protection, then that protection has to be opt-in rather than opt-out, and the fees should be prominently disclosed at the opt-in stage.
  • Fees should be be capped at $20, with a limit of one such fee per day.

Would implementing this drive thousands of banks into insolvency? No. But it would make banking much less expensive for the people who can least afford to pay huge fees for it.

14 comments

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When I got my first credit card, it would get denied if I had insufficient funds. I think that was a much better system than overdraft protection.

ing direct offers what they call an ‘overdraft line of credit’ that is usually around 500 bucks, i think. if you overdraw but get the money back in your acount within a day or two, it’s basically free. if not, the interest rate is 8 percent annually. my income still relies on paper checks, so their system definitely helps with the occasional ding. being able to pay rent when your account will be ten bucks short for a day or so is quite a relief.

“Would implementing this drive thousands of banks into insolvency? No. But it would make banking much less expensive for the people who can least afford to pay huge fees for it.”

But it would probably mean that the big banks couldn’t use economies of scale in automatic fee generation to cover the costs of the diseconomies of scale due to being too darn big. My guess is that the BoAs and JPMs of this world would have to charge for checking accounts — and little banks with lower overhead would offer free checking and get the bulk of the methodically careful and reliable customers.

Posted by anon | Report as abusive

banks suck! i own a small cafe and do my banking (including merchant) with wells fargo. we receive merchant credits in less than 24 hours. for example if we make $2000 and settle out – it is credited by appx 6am the next day. we have checks/withdrawals come through our account at midnight and then the merchant credit posts at 6am. let’s say my balance yesterday was $2000 and i had checks come through for $2200 last night and a merchant credit of $2000 this morning at 6am. lets say the amount of the checks were: $2000, $100, $20, $10, $20, $20, $10, $20 = $2200. so wells fargo will pay the big check of $2000 first and then charge $35 for each of the additional checks AND not consider the merchant credit at 6am sufficient to cover the checks – even though it shows as available. so basically i would get charged $245 for having a negative $200 balance for appx 4-6 hours. they should only charge $35 for the big check – not all of the others.

not only that, but if you go into a branch and deposit cash after 4pm – they do not count it as that days work – even though they say it is available to you.

hopefully new laws and regulations will be proposed.

Posted by Mel | Report as abusive

The whole idea of these fees is to discourage people from overdrafting and to keep higher balances. This lowers the cost of checking deposits for banks, which makes banks healthier by increasing their net interest margin. So by raising fees they lower the rates that they have to charge on loans and other products.

Posted by Aiden | Report as abusive

Check this out. I was charged 16 $35 overdraft fees by Bank of America. Yes, 16. A charge came through my debit card earlier than expected and overdrew my account. Because my card kept working, I kept using it and got charged a fee for everything I bought while my account was overdrawn. My $5 cab ride. Bam! $40. The $6 sandwich. Bam! $41. The fees are outrageous. I’m a student and am absolutely, utterly, and totally stunned at being charged such a severely onerous, excessive fees. Had my card simply stopped working, I would have been charged one fee.
My conversations with bank representatives have been the absolutely most wrenching, excruciating calls I’ve ever had with a company. Incredibly unprofessional, rude and stupid representatives who place you on hold for ghastly lengths of time. I was so truly stressed and upset after these conversations – in which I begged, to no avail, that the fees be reduced – that all I could do was go to bed for the day. I can’t buy food, I can’t pay my rent. Bank of America is evil. Beware!!!

Posted by Mohammed | Report as abusive

“The whole idea of these fees is to discourage people from overdrafting and to keep higher balances. This lowers the cost of checking deposits for banks, which makes banks healthier by increasing their net interest margin. So by raising fees they lower the rates that they have to charge on loans and other products.”

banks don’t seem to be giving out many loans nowdays but are certainly giving out lots of fees! they have become enablers and reap billions in monetary rewards for doing so.

Posted by Mel | Report as abusive

Mohammed….try calling the office of the CEO. I got back $210. once.

Call Executive Customer Relations:
Executive Customer Relations general line: 704-386-5687
Martha Dominguez, Executive Customer Relations Specialist: 714-792-4264

E-mail the BofA Customer Advocate:
Nancy M. Condos
VP/ Customer Advocate
Executive Customer Relations
Office of the Chairman
nancy.m.condos@bankofamerica.com

…or try the CEO!

Kenneth Lewis, CEO: Ken.d.lewis@bankofamerica.com

Posted by Carl | Report as abusive

Where are the public demonstrations about these very real fees as opposed to the possibility of higher taxes for healthcare.

I certainly don’t want higher taxation but I would rather see this money go to Katrina relief or other public relief the to the banks.

Posted by Duane Davis | Report as abusive

Where are the street demonstrations about these overdraft fees ?????

I would rather see my money go to Katrina relief or some other public relief than to these banks !!!!

Posted by Duane Davis | Report as abusive

I’ve had constant problems with BofA.

I call and complain and they return part of what they purloin.

I filed a complaint with the better business bureau and The Office of the Comptroller of Currency. below are their web sites where you file a complaint electronically. I also found this organization and filed a complaint with my congressman. also, contacting the CEO is a good idea. i heard that it actually works.

everyone here should do the same.

http://www.bbb.org/us/Find-Business-Revi ews/

http://www.helpwithmybank.gov/complaints  /index.html

http://www.affil.org/

Posted by carlos | Report as abusive

How about this? Write down everything you spend in a checkbook register. Then when it clears the account, even if it takes a few days, you have already subtracted it from your available funds. Manage your money better, and you won’t have to whine about the fees you are paying every time you borrow the bank’s money for your cab or sandwich.

Posted by Lee | Report as abusive

“How about this? Write down everything you spend in a checkbook register. Then when it clears the account, even if it takes a few days, you have already subtracted it from your available funds. Manage your money better, and you won’t have to whine about the fees you are paying every time you borrow the bank’s money for your cab or sandwich.”

This works right up to the point that you wind up with an unauthorized charge that overdrafts you. Which has happened to at least one person I know…then you wind up in the triangle, with Wells Fargo telling you THEY aren’t responsible (and won’t remove the fees) and the merchant telling you THEY aren’t responsible either (and will only credit the transaction). Sure, you could take one or the other to court…but even small-claims court (absent a lawyer) means you will need to take time off work…that you can’t afford, since now you owe $350 in fees because despite the fact that theoretically you only overdrafted once, they re-ordered the charges so as to maximize the number of fees.

And about that, how about a dose of logic: the one time I overdrafted (my own dumb fault, I admit…I assumed a check would take a couple days to arrive and clear) they re-ordered my charges so that I wound up with 12 overdrafts instead of the ONE check that (chronologically) would have dinged me.

Their reasoning? “That way your most important charges, like rent or mortgage, go through first.” Sounds reasonable, until you realize they CLEARED ALL THE CHARGES ANYWAY. This reasoning only makes sense if they stop clearing charges (and racking up overdrafts) within a reasonable period/number…when in reality, they’re more than happy to overdraft a consumer a dozen times or more…it’s just a way to charge $40 each for five Big Macs rather than only getting $35 extra on that one mortgage check…revenue enhancement, pure and simple. They never had any plans to “bounce” my tuition check (the one that sent me over for two days until my GI Bill money showed up in my account).

Posted by Carl | Report as abusive

Also, in the “triangle” situation I mentioned, I have pretty intimate knowledge of the bank’s motivation…I was the merchant in that situation. We put through an erroneous charge, the person came to us crying (and I mean that literally, not sarcastically), and despite our admission to the bank that the charge was in error they wouldn’t reverse the fees. They basically told me that SOMEBODY was going to pay those charges, that was the bank’s money now, and my bosses wouldn’t budge either…they weren’t about to hand Wells Fargo a few hundred bucks for nothing.

It’s not like there was a physical product lost, there. What costs, exactly, were there that prevented them from removing the charges? The entire system is automatic. Again, revenue enhancement, nothing more.

Felt bad for the customer, that’s for sure. She was pretty much screwed.

Posted by Carl | Report as abusive