The continuing fight against overdraft fees

By Felix Salmon
November 26, 2010

Even before the Consumer Financial Protection Bureau gets up and running, other branches of the government are fighting the good fight against excessive overdraft fees. First came the Fed, of course, which forced banks to get their customers to opt in to the fees, at least when it comes to ATM and POS transactions: no longer can they charge them automatically.

But then something very odd happened. The Fed rule came into effect on July 1, and by mid-September Moebs had some data on the number of bank customers who had decided to opt in:

About 90 percent of overdraft revenue comes from frequent users. The Moebs study noted frequent users, those with 10 or more overdrafts in a year, almost all opted in. For all consumers, consent varied between 60 percent and 80 percent with a median of about 75 percent.

This astonishes and depresses me no end. Most banking customers are relatively unharmed by overdraft fees; by far the greatest damage to consumers, and the greatest profits for banks, came from the poorer customers who could least afford it. Essentially, overdraft fees were a way for the banks to monetize the naiveté and imprudence of their least-sophisticated customers, and the Fed rule was meant to put an end to such predatory price-gouging. Evidently, it failed: Moebs reckons that banks’ total overdraft revenue will hit $38 billion in 2011, a new record high.

David Benoit, today, provides some bank-level data which is only marginally more encouraging:

Earlier this month, Regions Financial Corp. Chief Executive Grayson Hall said at a conference that roughly half of the bank’s customers who have overdrawn their accounts have opted in for protection. He said the impact of the regulation on Regions is less than originally thought.

J.P. Morgan Chase & Co. said earlier this month that, of those who frequently overdraw their accounts, 53% have chosen to sign up for the service. At J.P. Morgan, the service includes a flat $34 fee for insufficient funds, the phrase the banking industry uses to identify the fees.

Of those who overdraw four to nine times a year, 41% have elected the service, and of those who overdraft fewer than four times, 21% have chosen the protection, J.P. Morgan said.

Note here that JP Morgan’s definition of “those who frequently overdraw their accounts” means people who do so ten times a year or more — at $34 a pop. How many times do those people overdraw their accounts, on average? I don’t know, but if it’s over 14.7, then these people are spending more than $500 a year in overdraft fees. Which I can guarantee you is money they can’t afford.

Still, 53% is better than “almost all,” and across the board JP Morgan’s take-up is clearly lower than what Moebs found, maybe because the overdraft fee is so high. The bank might have been better advised to reduce it, says Moebs:

6.5 percent decreased their overdraft price. “We have never seen this many institutions decrease the price of a fee service in almost 30 years of tracking bank and credit union pricing,” pointed out Moebs. “Our data shows institutions which decreased their overdraft fees, actually maintained or increased their overall revenue in the past year.”

In any case, there’s clearly still regulatory work to be done on this front, and so I’m glad that the FDIC is stepping in.

Under the FDIC’s new rules, which come into force in July 2011, banks are going to have to start trying to help those frequent overdrafters. Banks need to

Monitor programs for excessive or chronic customer use, and if a customer overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve- month period, undertake meaningful and effective follow-up action, including, for example:

  • Contacting the customer (e.g., in person or via telephone) to discuss less costly alternatives to the automated overdraft payment program such as a linked savings account, a more reasonably priced line of credit consistent with safe and sound banking practices, or a safe and affordable small-dollar loan;4 and
  • Giving the customer a reasonable opportunity to decide whether to continue fee-based overdraft coverage or choose another available alternative.

Other parts of the rule are weaker, though: banks just need to “consider,” for instance, “eliminating overdraft fees for transactions that overdraw an account by a de minimis amount,” or alerting customers when their account balance is at risk of generating an overdraft fee.

This, however, I like a lot:

Under new Regulation E requirements that took effect on July 1, 2010, institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and POS overdrafts for a fee. In complying with these requirements, institutions should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives. Targeting customers who may be least able to afford such products such as through aggressive advertising or other promotional activities can raise safety and soundness concerns about potentially unsustainable consumer debt. Any steering activity with respect to credit products raises potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices (UDAPs), among others, and will be closely scrutinized.

There have been a lot of complaints about how aggressive and mendacious banks have been in their attempts to get their customers to opt in to overdraft protection. Maybe they’ll back off a bit now that the FDIC has said that it considers such activity to threaten their safety and soundness. It’s just a pity that the FDIC didn’t say as much when the Fed’s new rule was first introduced.

Comments
14 comments so far

Why would anyone be astonished at the willingness of people to sign up for overdrafting in view of the rates on credit-card balances? There is basically no evidence that interest rates or fees strongly influence consumer behavior. Limitations because of interest rates come from lenders’ judgement of credit risk – or did back when mortgage lenders considered credit risk.

Posted by skeptonomist | Report as abusive

“Most banking customers are relatively unharmed by overdraft fees…”

You’re right that most customers are unharmed but you could easliy and accuratly go much much farther here Felix.

Most customers (80-90%)banking relationship is heavily subsidized by the top and bottom 5-10% of all bank customers.

At my bank you can get a zero cost checking account and earn a 3% yeild on balances between $2,500 and $25,000. There are some “relationship” caviats in the fine print of course… you need to be enrolled in internet banking with no paper statements (free but saves us money.) You need to use your debit card at least 15 times/ month (like all banks we lover interchange income.) You need to have a direct deposit into your account monthly… this means we pretty much need to be your primary bank because if your payroll or Social security comes here than we’ve pretty much got you as a customer.

The bottom line through is none of those things make up for the 3% that we are paying on those middle balances and the cost of serving you as a customer. The money banks make comes primarily from the high end customers… but also from the financially suicidal ones who incure overdraft charges also.

The the responsible middle class and lower class swim for free. It’s a huge benifit to that huge subset of consumers.

Hope everyone had a great holiday!

Posted by y2kurtus | Report as abusive

Make banks send lists of customers who frequently pay overdraft fees to local credit unions and non-profit credit advisory services.

Posted by dWj | Report as abusive

Felix as poster child for the nanny state run amok. The whole liberal argument for this ‘reform’ was making sure the consumer understood the fee. Now, they do. They opted in. It was clear as day. Now step aside and let them overdraft! We’re all adults here; you’re happy to let this person go and drink a liter of vodka, but not overdraft his card for 30 bucks?

I overdrafted tons of times in college, and over time, I changed my behavior. I don’t blame Citibank or anyone else. And neither should these people.

I don’t get it.

Posted by west-coasting | Report as abusive

Nanny state my ass. Chase “encouraged” me to opt in to their excessive fees every time I logged onto their website, warning me that if I didn’t, I would lose their automatic credit protection. They made it sound very alarming, and I as a reasonably sophisticated consumer almost fell for it until I read the small print, which was indeed very small.

I’m not surprised people opted into this scam. I am glad that I avoided their trap. For what it’s worth, I hated their overdraft fees so much that I had requested more than once that they not let me overdraw my account — simply deny the transaction and not charge me. They always told me they would look into it.

Posted by Setty | Report as abusive

I’m betting west-coasting has found his home in the Republican Party.

Posted by walt9316 | Report as abusive

I used to have credit cards with Chase and Citibank. Both lost me when they started haranguing me on every login to their website. (Guess that is the point — I wasn’t profitable enough for them.)

Why the outrage, though? If people don’t like overdraft fees, they can find a bank willing to work with them to limit the cost. If they don’t care, why should we do the legwork to protect them?

Too few people patronize the community banks these days.

Posted by TFF | Report as abusive

CapitalOne also called me and encouraged me to Opt in to their credit card overlimit fees. The script used by the rep was extremely misleading, and I almost fell for it – I remember saying to her “I don’t understand why you’re calling – why would anyone NOT opt in?” and she replied “We’re required by federal law….” and that got my attention a little more, and I had her repeat the same script slowly, sentence by sentence, and it became clear what she was actually doing. I was so angry I almost canceled that credit card, but that would have hurt my credit score as it is my oldest open account.

Posted by garthwalker | Report as abusive

“At my bank you can get a zero cost checking account and earn a 3% yeild on balances between $2,500 and $25,000″

Um, I’d reality check that. That was then, this is now. You’re probably getting 0.3% now, and if not, these guys are doing some very interesting cost transfers.

My local humungo credit union is paying 0.6% on Money Markets 50K and up, and beating their competitors by at least 0.1% in pretty much all cases.

Anyone paying as much as you claim has got to be getting huge cost subsidies from somewhere.

Posted by ARJTurgot2 | Report as abusive

“Financial Drivers License” which tests for understanding of how to manage your money.

Posted by womanofoz | Report as abusive

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