It’s somewhat puzzling to me the big deal being made about the overdraft fees being charged for the use of debit cards. The reason is that the vast majority of consumers don’t overdraft their bank accounts, and those that do, do it at a pace of five times a year, showing the problem lies with a small percentage of people that seem to ignore the fee when making purchases, and then cry loudly when overdraft fees are implemented against them.
For example, a survey conducted by the FDIC found that 93 percent of overdraft fees came from only 14 percent of all consumers, and that they did it on average of five times a year.
According to some advocacy groups, the banks are making a lot of money based upon the consumers not being aware of the high costs of over-drafting their accounts, but that doesn’t really add up.
While there could be obvious exceptions to these conditions, as there are some people that are not capable of running their own finances, being in assisted living homes and places like that with checking accounts at their disposal, which they run their finances from. I could see there being protections for them so they are not allowed to overdraft there accounts, which are usually based on SSI or some other low income resource.
But other than these small number of circumstances, people overall are simply over-drafting their checking accounts and wanting to get away with it a minimal cost. In other words, they’re engaging in reckless and irresponsible behavior, while 86 percent of the rest of the population has no problem with it.
Another argument for regulating debit cards is it hurts poor people the most. But that really can’t withstand simple logic either. You mean banks should subsidize poor people by allowing them to overdraft their accounts? In reality it wouldn’t be the banks subsidizing them, but the rest of the responsible banks’ customers, if that were to become a reality.
Manipulating Order of Transactions
One of the sore points that some assert is a questionable practice by the banks is the reordering of the transactions as they come in. In other words, many times larger transactions are cleared before smaller ones, allegedly triggering more fees.
The problem with that argument is the majority of bank customers actually prefer business to be done that way, based on feedback.
Also it needs to be taken into account why overdraft became popular in the first place, which was to save from embarrassment at the checkout, and to keep from having to pay merchants’ fees on bad checks.
Could this be wrongly used by a bank? Yes it could, but the logistics of it would be enormous, unless they have some type of system in place which initiates the reordering to their benefit, which would be really easy to identify if that was the case, and would ultimately lead to successful lawsuits. So that’s doubtful.
But let’s face it. We know that the banks know all these percentages, and so are surely going to take advantage of them. In the end though, it’s consumers’ banking practices that trigger the overdraft fees, and not the banks. Like I said, 86 percent of banking customers rarely trigger them, while the remaining 14 percent account for 93 percent of the fees. All they have to do is change their behavior to deal with the problem.
Communicating with Customers
Now the one area that I agree could be changed would be in the communication side of it. Many banks simply include overdraft protection as part of opening an account with them, without letting the customer know.
If I was a bank, I would voluntarily let customers know that they could opt in or out of overdraft protection if they choose, laying out the fee structure to them. I know for a fact that the vast majority of customers would choose to include the overdraft protection in case of emergencies.
As the FDIC data show, even after being hit with fees on average of five times a year, bank customers continue to overdraft their accounts. So even though the banks don’t communicate the fee structure at the outset, how many overdraft fees does it take for someone to learn? Again, this doesn’t make sense from a regulatory standpoint, as how can you regulate a bank concerning someone who knowingly overdrafts their checking account over and over again?
According to the banking industry, the fees charged for overdrafts pay for the free checking offered to their other customers. If the fees were eliminated or reduced, the banks have implied they may start to charge a monthly fee on each checking account that is now free.
Some industry observers say if the fees were regulated, you could see hundreds of more financial institutions fold, as it’s one of the largest sources of income at this time coming in. Even if banks were to find other fees to charge, the time it takes to put them into practice would be too late for many of them to survive.
Other than forcing banks to disclose to their customers about the overdraft privileges and responsibilities, along with the fees if they’re not followed, I don’t see much else that can be done which won’t hurt, rather than help, the overall banking industry and their customers.
As of 2008, about 41 percent of all U.S. banks use overdraft programs, and of the large U.S. banks, 77 percent use them.
