Overdraft Fees Revisited

by: Felix Salmon

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 (NYSE:C) 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 (NYSE:BAC) and Wells Fargo (NYSE:WFC) 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.