Regulatory failure du jour, overdraft-fee edition

By Felix Salmon
June 1, 2013

This is a chart of US banks’ overdraft revenue over the past 13 years. It was growing steadily until the Dodd-Frank Act passed in 2010, at which point it dropped for a couple of years, but now it’s back on its upward path, and it’s projected to hit a new all-time high by 2016. (The source is Moebs, here and here.)

This chart is not what I expected to see when I wrote an NYT op-ed last year, talking about the way in which the new rules governing overdrafts were resulting in banks charging monthly fees for checking accounts instead. I said in that piece that the standard checking-account business model had been “upended” by Dodd-Frank broadly and by the end of automatic overdraft protection in particular. No longer, I said, could big banks count on a steady source of income from relatively poor Americans paying $30 in charges for a $4 cup of coffee.

But if you look at this chart, the drop-off in overdraft income was relatively modest. Overdraft fees fell from $37.1 billion in 2009 to $31.6 billion in 2011 — which was still higher than they had been in 2006, or any year previously.

This, it seems to me, is a clear failure of behavioral economics — or, to put it another way, shows the degree to which a determined corporation can circumvent rules designed to prevent fee-gouging. Under the new regulations, banks could no longer automatically sign account-holders up for these huge overdraft fees; instead, those account holders had to opt in. But a study last year from the Pew Charitable trusts — which came out a couple of months after my op-ed — found that “more than half of those hit with overdraft fees did not believe they had opted in to the policies”.

Back in 2010, I was depressed that so many frequent overdrafters had opted in to the schemes, but hopeful that the FDIC would put an end to banks sucking hundreds of dollars a year in overdraft fees from the very customers who could least afford them. Evidently, that didn’t happen: with Moebs now projecting that overdraft fees will continue to rise indefinitely into the future, it looks like all of the reforms did little more than to force a temporary¬† setback in terms of banks’ overdraft-fee income. The regulators, it seems, have lost again.


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To me, what this demonstrates is yet another demonstration of how regulations just don’t work and opportunity that can actually fix the problem.

Eventually, some banks will offer something competitive. Once that happens, so many dissatisfied customers who know they’re being ripped off because there aren’t at the moment any other options, will bail and go somewhere else.

That, will fix the problem and the graph will show a decline in this particular revenue stream. Until then though, it will continue to climb.

Posted by Twinkbait | Report as abusive

@Twinkbait – that presumes that these customers – or more precisely, customers who fit with this same group based on demographic profiling of income level – are profitable banking customers as a group without large overdraft fees being paid by some people. I’d submit that they probably aren’t.

Posted by realist50 | Report as abusive

If we had (or ever have) some kind of national initiative to roll out broadband access, like electricity and water, then I would agree with @Twinkbait. But it seems like the demographic profile of folks that incur these fees precludes them from reliable internet access which means high overhead for banks that serve them in the form of storefronts and tellers. On the other hand, capturing just a quarter of that fee revenue would be an incredible amount of money for some other business model/venture, so seems like something would come along eventually that was better for them.

Posted by Harpstein | Report as abusive

Realist50 you would be incorrect.

See here as one example of many that are easy to locate: raking-in-billions-in-profits-from-overd raft-fees/

The banks recognize the above, and all continue to collude, because it is so profitable. Once one breaks ranks, it’ll be a torrent of new customers to the leader.

Posted by Twinkbait | Report as abusive

I’ve often wondered if it’s not simply a case of education with the “frequent overdrafters” … show them (in a manner that they grasp) how monetarily detrimental it is to constantly overdraft their accounts so that they will change their behaviors.

It seems clear to me that the current state of things ($30+ overdraft fees charged to individuals who can least afford it) should be considered unacceptable to all parties involved (except for the banks, which operate per the rules of capitalism, and therefore ignore any moral issues associated with their activities). Unfortunately, the author has shown that regulation has been ineffective in changing the status quo.

Perhaps current regulations aren’t sufficiently draconion in nature. What if the regulations required banks to charge at least $100 for the first overdraft occurance in a calendar year, and then close the bank account if a second overdraft occurs? While this would be initially painful for the “frequent overdrafters”, I believe it would act as an effective substitute for eduction in obtaining behavioral change.

Posted by VirtualThumb | Report as abusive

@Twinkbait – the article to which you linked does not address my question. I am not disputing that overdraft fees are a profit center for banks. My question is – but for overdraft fees, are these customers profitable for a bank?

How much revenue does a bank generate from someone with an average checking balance of say $2,000 to $3,000? Outside of fee income, it is minimal. Fee income needn’t be just overdraft fees – could be merchant fees on a debit card, or customer fees for using out of network ATM’s, or a monthly account fee. A no-monthly fee checking account with that low of an average balance, however, is just a loss leader that the bank hopes generates revenue elsewhere. That revenue might be from overdraft fees, or it might be from being able to cross-sell mortgages, auto loans, and credit cards to enough of those customers.

A torrent of new customers is a curse and not a blessing if those new customers aren’t profitable.

Posted by realist50 | Report as abusive

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