the audit

The Banking Industry’s Other Bad Loans

April 10, 2009

Felix Salmon has an interesting chart showing what he aptly calls the “Usury Datapoint of the Day.” The chart shows the ratios of how much banks charge customers for overdrafts to how much the customers actually over-borrowed.

It’s even uglier than you might suspect:

The typical overdraft fee these days is in the $35 range. And how much is borrowed when people get an overdraft? The thing is that most of the time the overdraft is inadvertent — which means that the account drops only a tiny bit below zero. In the case of debit-card transactions, the average overdraft is only $17. And as a result, as the chart above shows, if you go overdrawn as a result of a debit card transaction, you’re likely to pay $1.94 in fees for every dollar you borrow.

Lots of people wrongly assume that banks won’t let them overdraw their accounts—that their cards will be declined if they go under. But banks want you to overdraw so they can rack up these huge, high-margin fees, which total about $17.5 billion a year, according to the consumer advocate Center for Responsible Lending in this USA Today story, which also says:

In recent years, consumer groups have received an increasing amount of complaints about overdraft fees. The Federal Reserve has proposed a rule, which it expects to finalize by year’s end, that requires banks to give customers the ability to “opt out” of overdraft programs.

But advocates say the rule doesn’t go far enough because banks don’t have to obtain explicit permission from customers to pay their checks and debit card transactions. A bill by Rep. Carolyn Maloney, D-N.Y., would require banks to sign up consumers for this service.

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That’s a good first step. Another might be to ban banks from using the Orwellian term “overdraft protection” to refer to this “service.”

But wait, you say. Shouldn’t people be responsible enough to balance their checkbooks? Sure, but banks shouldn’t be making huge, usurious “fees” off of their worst-off customers.

USA Today again:

Young and low-income consumers are disproportionately affected by overdraft fees. “The most vulnerable consumers are getting hit with these fees,” says Chi Chi Wu of the National Consumer Law Center.

I like how Salmon frames this as “usury,” which is essentially what it is—the bank is loaning you the amount you overdraw and charging you an astronomical interest rate for the privilege.

And he steps back to look at our rotten banking system more broadly:

But the question is: do we actually want to live in a country where banks lose money on stupid loans and make it up by socking the poor with exorbitant fees?

And this is an interesting thought:

If you look at the entire global banking sector over the history of the modern world, I’m pretty sure that looking at interest income alone, it has lost an enormous amount of money in aggregate. Those losses are paid for, generally, by some combination of government bailouts and increased fees.

I’d like to see some numbers on how much the banking industry has gained or lost in the modern era. Anyone got ’em?

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 Follow him on Twitter at @ryanchittum.