Bank accounts get low. Sometimes, they even get negative. Obviously, you should try to avoid overdrafting your account, but do you deserve to be harshly punished for it? Should banks derive a large amount of their profits on charging fees to people who, by definition, are least able to pay them? If we view an overdraft as something like a loan – after all, the bank is making funds available to you that you don’t currently have – should banks be able to charge absurdly high interest rates?
Here’s what happens. It used to be that many banks just didn’t cover overdrafts, but what many — 462, according to the Wall Street Journal — do now is enroll their customers into “overdraft protection” programs so that they will cover the overdrafts, but also charge a fee, which can range from $10 to $38. Since 2001, these programs have become widespread; about 70 percent of banks that have such programs have adopted them in the past eight years. (For all you U.S. Bankers out there, they have let you opt out of overdraft protection since 2007. Here’s a form for opting in.)
For small to medium withdrawals, the bank is basically loaning money to the most disadvantaged and under-informed customers and charging absurdly high interest rates on them. If you overdraft by $50 and get hit up with a $30 fee, it’s a cash loan with a 60 percent interest rate. And these relatively small withdrawals are typically what put people in the red. The median ATM withdrawal that triggers “overdraft protection” because of non-sufficient funds is only sixty dollars, and the median fee is twenty-seven dollars.
In any other situation, we would find such practices unconscionable (paid off over two weeks, such a transaction as described above would result in would incur an APR of 1,173 percent). But because customers are largely opted into these programs, they aren’t aware of the risks they face until they’re hit up with the fees. Among big banks, these type of automatic, opt-in programs are pervasive. According to a Federal Deposit Insurance Corporation study, nearly 77 percent of large banks were more likely to have automated overdraft programs, which means that your typical bank customer is enrolled in such a program.
Even more scandalously, banks can charge these fees on multiple withdrawals per day. So, if you make a series of small overdrafts, each and every one of them would be charged the flat withdrawal fee, which could total up in the hundreds.
So, why do banks let their customers access money they don’t have? What’s weird is that, in many cases, banks could easily inform their customers that they don’t have sufficient funds for a transaction, and then refuse to let them withdraw money or at least inform them of the repercussion. The same FDIC study says that 81 percent of banks that operate these automatic programs “allowed overdrafts to take place at automated teller machines (ATMs) and point-of-sale (POS)/debit transactions.” But did these banks inform their customers that they were about to take out a high-interest loan? Once again, according to the FDIC, “most banks whose automated overdraft programs covered ATM and POS/debit transactions informed customers of an NSF only after the transaction had been completed.”
Clearly, banks wouldn’t operate these programs in such a way to encourage their customers to overdraft if they weren’t making money from them — and they are. A Center for Responsible Lending study shows that banks and credit unions collected $34.3 billion dollars in overdraft and non-sufficient fund fees in 2008.
Since banks are suffering in their core business, taking in deposits and loaning money, they have to turn to more shady ways of keeping up revenue. I’ve already discussed the explosion of exploitative credit card fees and penalties which are just a way for banks to squeeze money out of the disadvantaged and under-informed, and overdraft and non-sufficient funds fees are just the same.
Consequently, banks don’t have the best public image, so lawmakers are becoming a bit more bold in going after them. In response to public pressure, Bank of America and J.P. Morgan are voluntarily reforming their overdraft practices. The Wall Street Journalarticle on the changes shows just how bizarre and exploitative the banks practices were: “The changes include no fees at BofA if customers overdraw their account by less than $10 in one day, and no fees for J.P. Morgan customers if their account is overdrawn by $5 or less.” Remember, before the banks decided to change their act, they could charge fees much larger than the five or ten dollars that someone overdrew. There is also a proposed bill in the House of Representatives which would make banks get their customers’ permission before enrolling them in an overdraft protection plan.
While the J.P. Morgan and Bank of America policy changes as well as Congressional attention are welcome, they are hardly enough. Concerted public and congressional effort will be needed to shift our financial services industry from one that is primarily concerned with finding sneaky and hidden ways to sneak away money from their customers to one that actually serves them. Such a financial sector would probably be much smaller, but that doesn’t sound like such a bad thing, does it?