Although I cannot help but think Senate Bill 1595 ("The Stop Overdraft Profiteering Act of 2019") faces a harsh reception in this political environment, I also can’t help but believe we need legislation to address the problem of overdraft fees.
Our payments system is too slow, too inconsistent, and too vulnerable to fraud. Some say that payments are effectively a tax on all economic activity, levying a transaction charge of one to two percent on our gross national product. Either directly or indirectly, consumers spend hundreds or thousands of dollars each year to use cards and checks. Payment operators must modernize their products. The time for improvements has come.
We accept overdraft fees as a penalty for a mistake, and while it’s not unusual to have to pay the price for an error, the price has become disproportionate to the degree of negligence. Last year, Americans spent $11.2 billion in overdraft fees. Ten states have a smaller state budget. US overdraft fee revenues exceed the gross national product of 49 countries. Those who would acquiesce to the current state of affairs will contend that banks charge a fee because they bear direct and indirect costs to cover overages. That is true, but it doesn’t have to be that way. Reform of overdraft means redesigning paper checks, but that should happen for reasons not just because of their asynchronicity but also because of how vulnerable they are to fraud. We have needed overdraft reform for a long time.
One problem I see with a checking system funded by overdraft fees is that it has the effect of penalizing lower-wealth people. It is not an overreach to assume that lower-wealth people tend to keep lower balances in their accounts.
My reaction upon reading the bill is that while S. 1595 targets several of the most pressing problems, it also misses on others.
The Good Parts
No high-to-low check sequencing: The bill says that transactions shall be posted “in such a manner that minimizes overdraft coverage fees and nonsufficient funds fees.” High-to-low check sequencing increases the number of times that an account can overdraft. A rulemaking procedure would certainly take that to prohibit high-to-low check sequencing. That is not to say that it would require low-to-high check sequencing. High-to-low check sequencing could become less critical if banks increased the frequency of non-time-stamped batch debit processing.
No overdraft fees arising from holds placed on accounts. When consumers use their debit cards to buy things without a fixed known cost, payment processors must predict how much they will spend. Examples of such instances include purchasing gasoline at the pump or presenting your card to a waiter to pay for dinner. The hold can remain on an account for many days. The bill says that funds held as a hedge against a spend could not be the sole reason for an overage. Consumers deserve this courtesy, as they are unable to know when a hold has been placed on their account or for the hold’s size.
No overdraft fees on overages generated by ATM withdrawals and one-time debit card transactions. Under the current law, consumers must opt-in to permit overdraft coverage for these use cases. Some banks, including Bank of America, have already taken the step to cease charging fees in these situations. Bank of America still generates plenty of overdraft fees. This rule change could occur now, without legislation, given the current technological capacity of our payments rails.
Update reports to credit bureaus: The bill says that banks are responsible for notifying a credit bureau when a previously reported debt due to an unpaid overdraft has subsequently been satisfied. The bank must ask the credit bureau to delete the outdated information.
Prompt notification: The bill says that a bank must notify a consumer within the day when an overdraft fee has been charged. Neither the technological ability or the financial feasibility of push notifications stand in the way of letting consumers know when they need to put the brakes on their spending. Besides, if there is going to be a cap on the number of overdraft fees charged in any single month, then notifications will have to be a part of the new checking account ecosystem.
Where S. 1595 Falls Short
Extended overdraft fees: The bill makes no mention of the parallel practice among banks of applying individual short-term late fees for times when accounts remain in the red for more than a few days. Banks vary significantly in terms of how they design their extended overdraft fee regimes. Some will charge a new fee in as few as a handful of days. Sometimes the charges are five dollars, but in other cases, they can be as high as fifteen dollars. These fees have no merit. The logic that banks have to undo a transaction in the case of a returned payment does not hold here, as no new fee will have been assessed on the bank as a result of the gap in time. True, a bank does have to bear the cost of the time value of money, but interest expense on twenty dollars over ten days at typical ultra-short-term borrowing costs hardly amounts to more than a few pennies.
Faster payments overdraft: The bill remains silent on the application of an overdraft fee on a transaction that goes through the faster payments rails. Faster payments represent an instance when technology has the ability to eliminate a problem. Faster payments are not “pull payments.” A pull payment, where the payee’s bank sends a request to the payor's bank, leaves the account holder’s bank out of the equation at the moment of payment approval. A paper check is an example of a “pull payment,” although there are other equally common ones; when a person gives permission to a cable company to withdraw your monthly bill from your account on a recurring basis, then future requests for payment are sent by the cable company’s banks to your bank through pull payments.
It would be proactive for S. 1595 to apply a real-time settlement of this issue, rather than waiting until the next legislative opportunity. Banks can avoid incurring any costs for covering payments, and as a result, there is no basis for a bank to charge an overdraft fee for an overage resulting from a faster payment. Notably, such a provision would not prohibit a bank from honoring a request for payment. Some banks already have no fee overdraft services in the marketplace. Such services could (and should) remain a viable way for banks to establish their “value proposition” to their customers. S. 1595 should merely state that a bank may not charge fees or interest for covering a request for payment in transactions resulting in overages that are processed by RTGS.
Closed accounts: The law should codify prohibitions against applying overdraft fees when a new payment request comes in on a closed bank account. Online payday lenders abused loopholes at some banks in search of opportunities to find some means to collect on old debts. If banks covered the request, then it left them with new obligations. For consumers who thought they had closed their account, it created a new nightmare. Anyone would be surprised to know that a closed account was suddenly alive – like a zombie that won’t go away.
A limit on the number of overdraft fees: The bill would limit to one the number of overdraft fees that a bank can debit an account in any month. As long as we give people more than one check, then they will be able to create the conditions to trigger more than one overage. We would have to contemplate the end of paper checks to make this provision valid.
A new idea in alternative lending circles is to consider cash flows as a basis for creditworthiness, the logic being that a person with demonstrated surpluses over a sustained period could be a reasonable credit risk even if there had been prior instances of poor repayment habits. Many of those technologies will involve screen scraping. The language on reports to credit bureaus doesn’t cover screen scraping, where a consumer consents to let a third-party collect screen display data.
I hope we see traction on this bill in the upcoming year, but the current state of affairs does not provide much optimism for that to happen. As I mentioned earlier, overdraft fees have become a national disgrace. Free checking is only free if you ignore the cost of overdraft fees. At some banks, overdraft fee revenue makes up more than three-quarters of all revenues derived from checking accounts.
Moreover, the level of variation points to how some banks have established overdraft fees as the cornerstone of their revenue strategy, even as others have not. How can overdraft fees make up only 17.5 percent of transaction account revenues at Citibank but 68.9 percent at Woodforest National Bank or 87.7 percent at USAA? I applaud Senators Booker and Brown for putting forth this legislation.