The Wall Street Journal runs a column today bemoaning the mortal wounding of the overdraft charge and calling for its resurrection by Congress.
John Berlau of the Competitive Enterprise Institute takes to the Journal to call for something he calls “The Free Checking Restoration Act.”
Yet over the past few months, the middle class has seen a beneficial feature of modern banking—free checking—begin to vanish due to these “reforms” and the substantial loss of bank revenues that they’ve caused.
There are two main culprits in free checking’s demise: the Federal Reserve’s new rules, in effect since July, that restrict banks from charging overdraft fees when customers overdraw their checking accounts; and the amendment from Sen. Dick Durbin (D., Ill.) in Dodd-Frank that puts price controls on the interchange fees that merchants pay to banks and credit unions to process debit cards.
First, Berlau bemoans the regulation of interchange fees (another way the less-well-off subsidze the better-off and a duopoly gouges consumers and retailers) as “price controls.”
If the overdraft rule ill-serves the middle class, the Durbin Amendment makes a mockery of the claim that Dodd-Frank was a victory for consumers over special interests. This provision requires the Federal Reserve to limit debit-card interchange fees that retailers are charged to what is “reasonable and proportional” to cost— basically outlawing profit for card- issuing banks and credit unions in their transactions with retailers.
Get that? “Reasonable and proportional” fees means “basically outlawing profit.” I don’t think so.
But the bigger problem here is the overdraft argument. For one, there’s no such thing as “free checking”—somebody’s going to have to pay for that service. Berlau sort of acknowledges this gaping hole in his argument, only to shoot it down by misrepresenting the data supporting it. It wouldn’t be The Wall Street Journal editorial page if a column wasn’t misleading readers, and while this one’s blatant, you might miss it if you’re not paying close attention (emphasis mine):
Some have argued that free checking was never “free” because its costs were subsidized by account holders incurring overdraft charges and by merchant fees. In June, left-wing Mother Jones blogger Kevin Drum called both these fees “basically surreptitious ways for the poor to subsidize the rich.”
Yet the data tell a different story. While it’s true that overdraft fees hit the poor disproportionately, the vast majority of even the lowest-income account holders have never been hit with these fees because they’ve never made purchases with more funds than they had in their accounts.
So the data tell a different story than poor subsidize the rich, but “it’s true that overdraft fees hit the poor disproportionately.” How does that work?
Data from the 2008 Federal Deposit Insurance Corporation’s Study of Bank Overdraft Programs, which surveyed 462 FDIC-supervised banks, show that more than 60% of low-income consumers with checking accounts never incurred a fee for overdrawing those accounts. The same was true for 74% of middle-income account holders.
So overdraft charges were not so much a subsidy from the poor to the rich as they were from the imprudent, who had overdrawn their accounts, to the prudent account holders of all income levels. And what’s wrong with that?
Ah, yes, the irresponsible poor. Nobody has sympathy for them. Look, you’re going to be far more likely to get overdraft fees if you have less money in your account. It’s just math. And the less money you have, the more overdraft fees you get, which sucks because, being poorer, those fees are a bigger deal to you and make it more likely you’ll get behind financially and incur more fees.
Here’s a nice stat to put in your back pocket: The poorest 10 percent of checking accountholders pay 40 percent of all overdraft fees.
This argument also elides the fact that banks intentionally structured their policies to lure customers into more and more overdraft fees. They wouldn’t let them turn off overdraft “protection”; they structured bank clearing so that large charges cleared first so as to be more likely to deplete an account and result in multiple overdrafts from smaller charges; their consultants even touted strategies to delay deposits in order to reap more fees.
And it’s worth pointing out that these fees are really exorbitantly priced short-term loans, with a median APR of 4,500 percent. Berlau would have you think it’s okay (moral, even!) to have imprudent poor people—less financially literate, naturaly—subsidize checking accounts for people not living on the edge. The average person hit by overdrafts paid $1,374 a year for them, according to one study.
Arguments are better when they’re above board, too—but then we wouldn’t have as many of them. Berlau calls for legislation overturning the “overdraft controls” that have resulted in the decline of free checking. Problem is, anybody who wants to have overdrafts on their account can still get them. Banks aren’t prohibited from charging them. They’re prohibited from automatically enrolling you in overdraft “protection” and not letting you opt out of it.
Berlau’s whole piece, which you can be sure the Journal endorses, is predicated on you not understanding that.
Look, banks have to make money. No one’s saying they don’t. But they should make their bucks above board, not with predatory tactics. Markets work better—they’re more, um, competitive—when costs aren’t hidden.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.