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.

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