The Scandal of Overdraft Fees

There’s been a lot of noise about overdraft fees of late, or NSF fees as they’re known in the industry. (It stands for non-sufficient funds.) Bank of America will now assess such things ten times a day, and the NYT’s Eric Dash has a good overview of the problem using data from Moebs Services:

The most unexpected change has occurred in overdraft fees — the industry’s most lucrative and controversial charge — where the typical fee rose to $26 after five years at $25.

The Washington Post, too, uses the Moebs data, but I’m a little bit suspicious — the chart accompanying Dash’s article shows total NSF fee income rising so steadily over the past five years that it’s hard to believe fees haven’t risen at all.

In March, by contrast, Michael Flores put out a detailed 22-page report on overdraft fees which shows them rising steadily over that period, from $27.04 in 2005 to $28.95 in 2008.

According to an FDIC study of bank overdraft programs, the median dollar amount of the transactions which triggered overdraft fees was just $36. The implicit interest rate on these “loans”, then, is in the thousands of percent.

Flores also has even scarier datapoint:

Active households (defined as the 20.2 million households with bank or credit union accounts who write the majority of NSF items) pay $1,374 in annual NSF fees.

This is a tax on poverty, it’s substantial, and it ought to be stopped: the 20% of bank customers who pay 80% of the overdraft fees are the banks’ poorest customers.

The WSJ’s Karen Blumenthal explains what’s going on in personal terms:

When our relative began to fall behind on bills, he agreed to give power of attorney to a son, who started paying the mortgage and other big bills, as well as reducing the amount available in his dad’s checking account.

What the son didn’t count on was that the bank would automatically cover up to several hundred dollars a month of his father’s overdrafts, which essentially gave him more money to send to scammers. In addition, he was charged $33 for every overdraft—running up hundreds of dollars in fees. When the son called Sovereign Bank, his father’s longtime bank, he was told that the protection was standard and that he couldn’t turn it off.

It’s the biggest banks who are the worst offenders here, making much more money off noninterest income (ie fees) than their smaller counterparts:

They should be stopped — what they’re doing is unconscionable. Whether you believe Moebs’ numbers or Flores’s, these fees account for the lion’s share of bank fee income, and are already running at well over $30 billion a year. Yes, America’s banks should be profitable. But not because of things like this.

(HT: Chittum)

Comments

[firedawg:]

While I disagree on the high fees, how on earth can you honestly call them a tax on poverty? How about a tax on people who can't live within their means. While I sincerely sympathize with those who are unemployed and/or having a tough time making ends meet, unless they are truly living within their means, let's not get all out of kilter here. Yes it is expensive to bounce a check, but perhaps a reality check truly is in order.....

Jul 02 05:18 PM

[Alfredo Mar...:]

If you don't like the high fees a bank charges for ovedrafts, how about not bouncing any checks? The bank is very clear about the fees you are charged for bounced checks.


People need to start taking responsibility for their own finances.

Jul 02 06:21 PM

[billddrummer:]

Or you can just unplug from banks altogether and avoid the fees. The temporary hassle of paying bills in person or with a 25 cent money order is well worth not having to pay hundreds of dollars a year for overdraft fees, checks, and the like.

It has greatly simplified my life.

Jul 02 06:44 PM

[jstratt:]

I normally keep an extra grand in my account and hadnt experienced this in a long time. About a month ago I overdrew by a couple hundred dollars which US Bank honored and charged me $39 on 3 transactions including a $6 lunch.

I have a choice which is to unwind my business activity with US Bank or not. Since charges at that level are nothing more than theft I will move my business.

Many people I assume are unable to generally keep an extra $1000 on hand making this a huge profit center on the backs of poor people. It is easy for a mid life person with a good job to act like they are standing on moral high ground and say dont overdraw checks. That doesnt justify the greed and avarice calculated to take advantage of the youth/young/weak etc.

I dont like it one bit! By the way if you study wealth data from the Fed it is shocking. Money is rapidly flowing away from 95% of the population. Just because I can easily afford these charges doesnt make them right.

Jul 02 08:14 PM

[Tony Petroski:]

In the Felix Salmon world, charges by a private enterprise are "taxes" and taxes by the government are "contributions," "investments," or "our patriotic duty."

Most poor people (I know a boatload of them) can manage their finances quite well without help from the Salmons of the world. They also can use cash (most do) and skip dealing with the banks.

I agree with an earlier commenter: It's infuriating when you get an overdraft fee on a small amount--especially when you've had a multi-year relationship with the bank.

The fee isn't "interest," and the charge reflects the administrative cost of getting paid back this small amount. It also acts as a powerful incentive to pay a little attention to balancing the checkbook.

Jul 02 10:55 PM

[Jon Jegglie:]

So where is the investment angle in this article since this is an investment site. So lets see if I have the "poor little guy" angle on the banks correct. The banks are evil because they were losing money and needed TARP funds, but they are also evil for enacting punitive measures against customers whose irresponsible behavior puts them at risk of further and greater losses.

Remember they are providing an optional consumer service as private corporations. If you don't agree with the terms of service, abide by the rules, go to a competitor, or do not utilize the service.

Jul 02 11:36 PM

[bolt turner:]

i think the point is - if you have one overdraft on a small account that you use for lunch, gas etc it could pound you perpetually before you see that your deposit was held up and now you have a train wreck that the fees suck up all your other deposits and creates more fees...

yes you need to keep a grand cushion - and that is the point - most people do not have that cushion and are getting raped

BAC screwed one of my accounts with some quirky billpay behavior but i was able to talk my way out of the whole wreck and only pay one... i threatened to stop paying my mortgage with them and wouldn't stop yellin at them.. they usually listen at that point

Jul 03 12:37 AM

[bolt turner:]

hahah same thing just happened to me but i was venomous and my magic words was i was going to stop paying my mortgage wih them.. that must of hit some primal fear in them and they gave back 3 of the fees and just kept one and called it even...

i keep a big cushion in it now since i use it for bill pay and dont trust it.


On Jul 02 09:32 PM bigmoney wrote:

> >> he was told that the protection was standard and that he couldn’t
> turn it off
>
> Indeed, you can't turn that sh*t off. I bumped up against this with
> Bankster of Amerika. I had been a long term customer since high
> school, a very long time. Well, they stung me one time, in a snafu
> with online bill pay. I called in, and they wouldn't wave it. Even
> talking with a manager.
>
> So long Bankster of Amerika. Hope you fatten up feasting up on Big
> Gubmint bailout.
>
> Compounding matters is they pay near zero interest. So I found
> a new bank. The new bank will still sting you with overdraft, but
> at least the checking account pays around 2%, so I can leave cash
> sitting in my checking account without getting robbed.

Jul 03 12:42 AM

[TinyTim:]

If I read the article and tone of the comments correctly, the problem isn't the actual NSF fees, it's the amount of the fees.
I agree the banks (especially Bangster) are raping people and most people with no money (i.e. poor) have low balances so are more likely to screw up. I don't think that relieves them of the obligation not to screw up, but a more proportionate response (sounds like DoD) from the banks is warranted. Tell me how much extra an NSF costs the bank these days when ink doesn't even touch paper.
Is the NSF fee to reimburse costs, punish, or fatten margins?


Many banks and credit card companies do respond to threats, particularly from big or long-time customers. I had a run-in with one over a $50 charge & threatened to leave. They called my "bluff", so I pulled out. A week later they sent a check for $50 with a nice note. I was already gone, so I cashed the check and told them to go to hell.

These policies also change over time. I used to get hit with min balance fees from Bangster occasionally. I would go to my local branch and the manager was always happy to credit back the fee. This stopped a while ago and a new manager showed up.

Jul 03 12:44 AM

[TinyTim:]

Also, ranting about Bangster:
You know you've been raped when their "Keep the Change" policy causes you to NSF.
I didn't even know what this was when they stuck it on one of my accts.. Silly ass me. I thought they were throwing me change to round up to a dollar from a debit checking into my savings acct.
They were actually transferring the change from checking and drawing down the balance each time.

Jul 03 12:52 AM

[SA Editor M...:]

When a one cent overdraft generates a $35 NSF charge (thanks, Wachovia!) one can blame the computers - but when customer service tells you they are only authorized to credit you $11 back, it's hard not to feel that the banks decide how much of your money they need today.

Many NSF charges seem, these days, to have crossed the line into predatory lending practices. One cannot assume, despite all the availability of real-time balance data, that a debit card will not be accepted if there is a negative balance, even though the banks are quite capable of doing so. Some banks have policies of allowing any use of a debit card as a credit card to go through despite a negative balance, as well as allowing up to $250 in cash advances despite a negative balance, happily charging $35 for each transaction. Additionally, banks will deny people with credit problems an overdraft line, instead in effect letting the same people 'write their own loans' for this $35 'per loan' charge. These same banks also decide the order in which, on a given day, charges are posted, in such a way as the number of NSF charges looks to be maximized.

NSF fees of themselves may not be a 'tax on poverty', but the lack of regulation that allows banks to play fast and loose with the calculations and applications is another story.

Jul 03 03:21 AM

[Davewmart:]

Surely though if the banks started charging for their normal services so that those who used them most would pay the most, that would hit people with the most money, which is un-American.
Much better to hit people who have less money, and less ability to fight back!
What silly ideas you do have!

Jul 03 07:45 AM

[john s. gordon:]

those who are powerless get raped the most.
it's a jungle out there/
> jack

Jul 03 08:37 AM

[whisperonth...:]

Just as the government suggests that a percentage tax on gasoline would be more fair (and more advantageous for them) than a flat tax on gasoline, so would a percentage NSF be more fair and subsequently more advantageous for the banks. Suggest 30% - for those who bounce a check/over charge a debit card for a $6 lunch, this would cost them $1.80 in fees. For those who do the same for a $100 purchase, the fee would be $30. For those who do it for $500, the fee would be $150.

For those who are less financially fortunate, the fee would still be sufficient to be painful. No one likes to pay $7.80 when the price should only be $6.00. For those who are more arrogant and understand that they could have the use of $500 for a small ($30 or less) fee, a fee of $150 may change their minds. And any bank that charge an NSF fee for less than $1.00 should be a bank with which one no longer does business.

Jul 03 08:37 AM

[DONE_SONZ:]

BAC lets you do it over and over again with your debit card.You would think it would just get declined.$25-$30 a pop.

Jul 03 08:39 AM

[John Galt:]

I don't like the idea of paying a 26 dollar fee so I do my best to never have to. I don't like the high rates credit cards charge so I pay mine off at the end of the month and actually make money via rewards programs.

In the old days, people used to buy things in cash. If you didn't have the money, you saved up to buy something. Today, people don't save up and wait... they charge it. Credit cards can be a very VERY dangerous thing as you have compound interest working against you. I wish more people understood this basic fact. Maybe high schools and colleges should have a basic economics/finance class instead of an extra art/humanities class.

Calling it a tax on the poor seems unfair. Call it a tax on the stupid... or at least careless.

I do like the idea of charging a percentage on the overdraft, but if these fees really annoy people, then don't spend money you don't have. In effect, the bank is lending you money and they aren't going to give you a loan on the cheap.

Jul 03 11:08 AM

[JCC:]

Ethics used to be an important part of business, as was fare treatment of customers. This has long not been the case with Banks and Insurance companies. Both of these industries, sometimes seem to treat the customer like an enemy.

There is nothing fare about the onerous overdraft fees, and the allowance and encouragement of continuation through bank machines, electronic payments and paper checks. Contrast this to a banks business accounts, where the customer is allowed to maintain a negative balance.

While there is an element of carelessness, there is also a similarity to a bully kicking someone in the head when they are down. You are out of money, and on the ground, so you get kicked in the head with an onerous fee.

Jul 03 12:26 PM

[MudEngineer:]

I was shocked when Wells Fargo Bank began charging me $10 to do an automatic computer driven transfer from a line of credit to cover any overdrafts that I might have. Now I pay them an annual fee to have the overdraft line of credit, I pay them currently 10% annual interest on any balance in the line of credit and I pay them another $10 per transaction if I actually need to use it. All of this on top of the fact that they are lending me my Taxpayer provided money to fund the line of credit. This is the truly the height of greed! I am being charged in multiple ways to bail them out from their own stupidity in past actions!

Jul 03 04:48 PM

[Ramesh Kris...:]

I totally agree. When you go the Banks' ATM and ask to withdraw $500 when you have even $499 in your account, they will reject your request. How is that different from going to an retail outlet doing the same thing (buying $500 worth of goods when you have $499 in the account).

The least they can do is ask "are you ready to get screwed with $35 overdraft fee". If the customer says "ok" then Bank can do whatever. And Banks saying we're here to help customer pay the bill, that is a laughable. You can help more by asking whether it is OK to charge NSF fee

Jul 03 08:07 PM

[DONE_SONZ:]

I didn't do it on purpose.I forgot a transaction or two.


On Jul 03 11:08 AM $ John Galt wrote:

> I don't like the idea of paying a 26 dollar fee so I do my best to
> never have to. I don't like the high rates credit cards charge so
> I pay mine off at the end of the month and actually make money via
> rewards programs.
>
> In the old days, people used to buy things in cash. If you didn't
> have the money, you saved up to buy something. Today, people don't
> save up and wait... they charge it. Credit cards can be a very VERY
> dangerous thing as you have compound interest working against you.
> I wish more people understood this basic fact. Maybe high schools
> and colleges should have a basic economics/finance class instead
> of an extra art/humanities class.
>
> Calling it a tax on the poor seems unfair. Call it a tax on the stupid...
> or at least careless.
>
> I do like the idea of charging a percentage on the overdraft, but
> if these fees really annoy people, then don't spend money you don't
> have. In effect, the bank is lending you money and they aren't going
> to give you a loan on the cheap.

Jul 03 08:41 PM

[William James:]

Banking really isn't optional just as having a credit card in today's world isn't really optional either, which is why the banks should expect to be regulated. Sure they can charge NSF fees but such fees should be reasonable and relate in some way to the costs incurred by the bank in servicing the NSF check. The current fees are not reasonable and do not relate in any way to the costs of a bounced check. And yes the banks can and should expect to be punished for their part in getting us all into this awful mess, that is the price they pay for being bailed out by the taxpayer, and for bouncing about the biggest check anyone has ever seen.

On Jul 02 11:36 PM Jon Jegglie wrote:

> So where is the investment angle in this article since this is an
> investment site. So lets see if I have the "poor little guy" angle
> on the banks correct. The banks are evil because they were losing
> money and needed TARP funds, but they are also evil for enacting
> punitive measures against customers whose irresponsible behavior
> puts them at risk of further and greater losses.
>
> Remember they are providing an optional consumer service as private
> corporations. If you don't agree with the terms of service, abide
> by the rules, go to a competitor, or do not utilize the service.

Jul 04 12:14 PM

[Wildhawk:]

I think there is a fairly simple solution to NSF fees- go to an overdraft line of credit model.

I bank with US Bank, having switched from TCF because of several $35 NSF fees a few years ago when I was buying a home (long story, boils down to a check being held for 2 weeks to clear and TCF whacking me with fees every day until it cleared). When I signed up with USB, I asked for a way to avoid NSF charges, for which they suggested an overdraft line of credit.

The overdraft line works like a credit card, and has a $3,000 limit. If I overdraft my account, USB automatically transfers money from the credit line to my checking account (in increments of $200) to cover the overdraft. No transaction fee is charged, but I pay a fairly usurious level of interest on the credit line balance (last I checked, it was something like 21% annualized, prime plus 18% or something to that effect, with a 25% cap).

This serves to eliminate the aggravation of a $35 fee being completely out of proportion to the potential transaction size (e.g. the $6 lunch noted above), but still serves as a profit center for the bank, as I'm paying a credit card-like interest rate until I shift money back from checking to cover the credit line balance.

It works for me, makes me very leary of overdrawing the account due to the usurious interest rate, is completely transparent, and allows me to avoid overdraft fees. What's not to like, as long as I'm informed about the high interest rates, just like with a credit card?

Jul 06 04:10 PM

[maryanne:]

Its your own fault for not properly managing your finances! Hitting them with fees is only way to make them learn and if they still don't get it, they deserve to be poor! Don't make the responsible pay for it.

Jul 06 07:46 PM

[freekate:]

If you haven't been there don't judge it. If you had been there you would be more understanding. Not everyone is born a financially healthy person. Most people in "Poverty" are there because of a flaw they cannot fix by themselves. To blame poverty people for being financially irresponsible, is to blame an alcoholic for drinking too much. By the way there are plenty of people who have similar flaws who don't get blamed, and many of them are selfish bankers. In each case, it is an addiction. Some to food, like myself, some to alcohol, some to money they don't have, and to many it's money they can get from others at any price. In all cases, no amount is enough. There is no satiation. It's is too bad more of us aren't addicted to compassion.


On Jul 02 05:18 PM firedawg wrote:

> While I disagree on the high fees, how on earth can you honestly
> call them a tax on poverty? How about a tax on people who can't live
> within their means. While I sincerely sympathize with those who are
> unemployed and/or having a tough time making ends meet, unless they
> are truly living within their means, let's not get all out of kilter
> here. Yes it is expensive to bounce a check, but perhaps a reality
> check truly is in order.....

Jul 15 11:41 PM