It’s The New York Times turn to do a nice story on “overdraft protection” practices.
First, the Times piece. Eric Dash has a snappy take on the issue, rounding up lots of good points and making it clear he’s on your side (emphasis mine):
Even now, after all those bailouts, banks never seem to tire of dipping a little deeper into your wallet. Despite the tough economic times and increased scrutiny from Washington, they are keeping most fees at record highs, and are eking out slight increases on others like overdraft charges — a step they rarely took during past recessions.
I submit that one way to turn around circulation numbers is to report and write more like this. Some might say that’s taking sides, but it’s no journalistic sin to empathize with the public. I’ll bet the antipathy to this gouging is almost unanimous among those who aren’t bank executives (think 99.9 percent of us). Why should the paper’s prose be clinical and detached when writing about something that’s clearly a ripoff? I think readers would love to know their paper is fighting for them. Too often they don’t. Papers make you read between the lines to appreciate what they do.
Digression aside, the Times has some very interesting stuff here. The argument for allowing banks like Citigroup and Bank of America to get so inordinately huge is that they become more “efficient,” lowering costs for consumers. Tell that to their customers getting slapped with overdrafts (emphasis mine):
The nation’s biggest banks — those that received the biggest bailouts from taxpayers, and are once again gaining strength — charge fees that are on average at least 20 percent higher than those at smaller lenders, according to Moebs Services, a economic research firm used by banks and federal regulators.
So your neighborhood bank, which presumably has a higher percentage cost of overhead than GinormaBankCorp, is somehow able to charge a fifth less than said behemoth. Hmm.
Salmon’s on this, too, finding a report by bank consultant Michael Flores that shows just how much more big banks depend on overdraft charges and the like:
It’s the biggest banks who are the worst offenders here, making much more money off noninterest income (ie fees) than their smaller counterparts.
Here’s his chart:
It gets worse. Salmon quotes Flores:
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.
I’m skeptical of that $1,374 number (can it really be that high?) but if it’s even half that, it’s an outrage. As Salmon says:
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.
This is certainly right. And it’s good to reframe these fees for what they really are: exponentially high-interest loans.
Think about it. If you accidentally overdraw your account, Bank of America, say, covers the excess amount of the purchase and charges you $35 for the privilege. They never asked if you wanted them to do that. And as we saw yesterday, some banks make it difficult or impossible to turn off “overdraft protection,” a term that I said ought to be in scare quotes every time it’s used in a news story. It’s Orwellian. This “service” allows overdrafts (most occur via cards these days), it doesn’t protect you from them.
Salmon reports that the median overdraft is $36. If you waited a year to pay that $35 fee, it would basically be a 100% interest loan. Of course, a bank would shut your account down by then. I’d guess most are paid within two weeks, when the next paycheck is deposited. A report (PDF) by East Carolina University professor Mark A. Fusaro put the median annual interest rate paid on overdrafts at 4,547 percent.
While you might dismiss overdrafts as a simple personal-responsibility issue, Fusaro found that 57 percent of account holders in its sample had overdrawn at some point, meaning that most of us are irresponsible.
Salmon calls this a “poverty issue,” which is red meat for a certain kind of commenter (bring it on!). But he’s certainly right. Fusaro found that 20 percent of account holders used overdraft protection for personal loans. Well-off folks aren’t doing that. Basically, these are payday loans that make that loathsome industry’s interest rates look tiny.