Forgive me if I’m unsentimental about the failure of institutions that make a living preying on their customers. And before you get all “personal responsibility” on me, let me say I wholeheartedly agree people should take care of their finances. But just because they should doesn’t mean they can, especially with the vicissitudes of the modern economy. The Times reports that 14 percent of bank customers account for 93 percent of all overdrafts. USA Today has reported that the poorest 10 percent pay for 40 percent of all fees.
Still, I’d be more sympathetic to the “it’s their fault” argument if people weren’t being manipulated into these charges. The banks set up the system to maximize pain for their customers—$27 billion worth this year. These aren’t bad checks. They’re card transactions that can be denied at the point of sale. Seventy-seven percent of big banks force you into it when you set up an account, and many of the banks won’t even let you turn off overdraft “protection.”
See, for instance, Bank of America squeezing overdraft fees from a mentally ill person in a halfway house—even after his sister had requested to have that “feature” turned off:
When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.
BofA found it in the kindness of its heart to grant an exemption from its policy of no-opting-out of overdrafts—after two years.
But the bad faith is even worse than that. I wish the Times had referenced a memo USA Today’s excellent Kathy Chu came up with last month that gives an inside look at the real nastiness of the industry:
Some consultants offered banks ways to boost overdraft and credit card revenue. A 2001 “checklist” from Profit Technologies — a firm that has worked with 19 of the USA’s 20 largest banks — has more than 600 strategies. Some are cost-cutting ideas such as printing a dispute form on the back of credit card bills to curb phone calls.
But most relate to income from fees. One strategy listed to boost overdrafts: “Allow consumers to overdraw their … accounts at the ATM up to the bank’s internally set limit.” To increase credit card fees, banks can “delay crediting of payments not received in bank provided envelop (sic) or for which payment coupon is not received for up to 5 days,” and “remove bar coding from remittance envelopes,” slowing the payment.
And banks reorder their transactions to make the biggest clear first. That makes it more likely that subsequent charges won’t clear, triggering those usurious loans marketed as “overdraft protection.”
A key problem with the overdraft coverage is one of framing. If you accept that they’re just “fees,” $34 sounds steep but not overwhelming. If you frame them as loans, though—which is how they should be viewed, since the bank is lending you money short-term to cover overdrawing an account and charging you for the “courtesy”—it really changes how they look. The Times is good to point that out here:
According to the F.D.I.C. study, a $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520 percent.
What can you say about 3,520 percent? And that’s low, according to one study, which found that the median APR on an overdraft is 4,547 percent.
The Times ends with a look at what might be done about it. It notes that ferocious lobbying by the banks led the Fed to protect their cash cow in a 2005 ruling. These folks are wounded now, but they aren’t going to let a super-high-margin line of business go quietly. That $27 billion can pay for a lot of campaign donations, ads, and high-priced lobbyists.
But if anything is done, we’ll have the press to thank, in part, for helping put this issue on the front burner.
The New York Times goes big this morning on the overdraft “protection” racket with a front-page story looking at this issue, one we’ve been eyeballing for a while here at The Audit as newsrooms across the country have put out good work on the subject.
But page one of the Times, fairly or not, is a whole other ballgame.
If for some reason you need more evidence to be convinced of the rotten nature of our financial system, read this paragraph:
Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.
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.
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.