Overdraft fees convince people to close their checking accounts. They drive people to alternative financial services. It isn't an accident that Americans paid $11.4 billion in overdraft fees in 2016. Through our policy-making, we have permitted a system to develop where a small share of consumers pay an outsized share of the costs of having a payments system. These practices are widespread. They can be seen in the terms and conditions of checking accounts at big banks, small banks, and even credit unions. Our economy is increasingly digital, but in spite of that, so many people are convinced that they can't afford to participate.
Let's review the scale of the problem, starting with the big banks. In 2016, America’s three largest banks collected almost more than $5 billion in overdraft fees all by themselves.
· Wells Fargo received $1.776 billion in overdraft fees.
· JPMorgan Chase collected $1.925 billion in overdraft fees.
· Bank of America garnered $1.653 billion in overdraft fees.
These numbers would be higher if the FFIEC’s data included other types of overdraft-related charges in these results. For example, due to the way the data universe is defined, these sums do not include overdraft fees paid by businesses for business checking accounts. Because of how books are kept, extended overdraft fees are defined as interest and not as fees.
Overdraft fees are a silent killer, and they do a lot of killing: $11.4 billion exceeds the gross domestic product (“GDP”) of 51 countries. Revenues recorded from overdraft at the three largest banks outpaced the GDP of 34 countries.
In the span of one unfortunate day, overdraft charges can do lots of damage to the savings of a working family. Each time a person debits their account – and not just the first time they cross into the red – they are vulnerable to receive a fee of as much as $41. To make it worse, all too often these charges happen in sequence so that a person will be hit with several fees on the same day.
If the account remains in the red for more than a few days, then many banks will add on an “extended overdraft charge.” Some banks will charge as many as ten overdraft fees in one day.
They Make Exceptions
In some cases, banks elect to waive the occasional overdraft fee as a courtesy. If you ever get a notice of an overdraft, you should always call your bank to ask to have the charge removed.
I spoke with the CEO of a bank about this topic last year. He remarked that in the previous quarter, his bank had waived 1/3rd of its overdrafts.
Personally, I sense that the collective generosity among the decision-makers at most banks not random. Most likely,
Make no mistake about it - banks are not about to give these fees up. While the big banks yield the most, the smaller banks draw upon the fees for more of their overall business. In some cases, small banks rely upon overdraft for almost half of their business.
Sometimes news reports lay bare just how much some bankers adore the overdraft. One CEO of a large bank named his boat “The Overdraft!”
Free isn’t Free
Checking accounts could never be marketed as “free” if it wasn’t for these fees. Without them, banks would have to raise prices.
As odd as it might seem, I believe that more people would use banks if checking accounts charged an upfront monthly fee. I know – it sounds illogical for a consumer advocate to support more bank fees. But stick with me. I think the truth is that we should all be ok paying for our bank accounts because by doing so, the cost of the system is going to be shared more equitably.
The current system doesn’t work that way. A few pay, while others enjoy a free ride. According to the Consumer Financial Protection Bureau, a consumer watchdog agency, eight percent of account holders paid approximately three-fourths of all overdraft fees.
If we take that math one step further, then we can see that those individuals pay for almost 40 percent of the entire cost of retail checking. That isn’t right.
The current system has an impact upon who participates in the banking system. There are implications for the rise of the so-called “unbanked.” Today, in an era where a great deal of commerce is transacted over the internet and through phones, many households have decided to live without a bank account. While there are many reasons why people decide to opt-out of banks, we can’t avoid putting some of the blame back on how we fund our checking accounts.
We can find evidence to support these assertions. The number one reason, according to research from the FDIC, is because of a bad experience with overdrafts.
Their findings hold up to common sense. We know that many – if not most - people live on a tight budget. They just cannot afford a surprise $35 overdraft fee.
To make matters worse, these exorbitant numbers are at least partially derived from confusion. Many people are surprised to know that their accounts are set up with an overdraft service. A study from the Pew Center found that almost one-in-five overdraft recipients, having decided against opting-in, were amazed when they subsequently get a notice of an overdraft fee for a bounced check. They didn’t realize that the opt-in rules only govern a subset of all transaction types.
To conclude: using overdraft fees to pay for our payments system is a big problem. The downsides to this approach fall disproportionately upon our least fortunate consumers, who are unable to shirk off fees because they have a better Customer Lifetime Value. The end result is that millions choose to opt out. In doing so, they sit on the sidelines while our economy shifts to a digital marketplace. They don’t build a financial profile, and as a result, they can’t get on the proverbial elevator that starts with checking and ends up with a home mortgage.
Billions of dollars in fees have a way of coloring a customer’s perception of banking.