Overdrawn
and Overworked: The Problems of Overdraft Fees
This
was originally published on Occupy.com.
We have all been shafted by overdraft fees from our
bank at some time or another. It’s an annoyance and frustration, especially to
those of us who already don’t have much money as well as a constant puzzle: If
one doesn’t have $5, how are they going to pay an extra $35? Yet banks continue to do this and rake in
money, as can be seen by them having made $35 billion[1]
in overdraft fees in 2014. In order to get a better handle on the problem of
overdrafts, we need to understand the history of such fees as well as reframe
how we look at the situation, changing our perspective to see overdraft fees as
a sort of loan rather than a fee.
After World War 2, society as a whole began to change,
included how people borrowed money. Credit itself began to change with things
such as pawning and open-book credit (in which goods are shipped with the
recipient promising to make payments) declined in usage and were replaced with
other forms of loans such as payday loans, credit cards, and overdraft
protection. However, it wasn’t as if everyone had access to overdraft
protection, it was generally reserved for those high-income customers who were
having short-term problems. Yet, as time wore on more and more people gained
access to overdraft protections, with “banks and credit unions [offering]
‘courtesy pay’ or overdraft features” starting in the mid-1990s “so that
consumers could overdraw their checking or debit accounts, for a fee.”[2]
What was important, though, was that people were accruing these fees on their
own, however this would change in the new millennium.
In 2003, it was reported that around 1,000 banks
were “encouraging customers with low balances to overdraw their checking
accounts, allowing the banks to skirt credit laws and collect billions of
dollars in new fees.”[3]
Banks were now actively encouraging people with little money to spend beyond
their limit as to have to pay massive amounts in fees. From the banks’
perspective, this made since as USA Today
noted in 2005 that overdraft fees “provide a more stable source of income to
banks than products tied to fluctuating interest rates.”[4]
According to an FDIC 2006 survey, it was reported that “overdraft fees on average represent 6% of total net operating revenues
of FDIC-insured banks.”[5] It seems that only a small
group of banks are making money off of overdraft fees. Data from the company
SNL Financial showed that during the first quarter of 2015, the three largest
banks (JP Morgan Chase, Bank of America, and Wells Fargo) “collectively
generated $1.14 billion from overdraft fees and related service charges”[6]
and that those very same banks were also the ones that collected the highest
ATM fees of the first quarter. So, not only have banks been actively
encouraging people to get overdraft fees, but they were making a killing from
it.
There are a number of other problems
with overdraft fees, such as their similarity to payday loans and how they act
like credit cards, but are worse. A 2005 report from the Consumer Federation of
America found that overdraft fees were similar to payday loans in that those
without enough money to make ends meet until the next payday were effectively
given a cash advance by being able to overdraw their account, however, overdrawing
one’s account was similar credit card usage.[7] Yet, with credit cards,
banks aren’t allowed to take funds directly from a person’s bank account to pay
off a credit card debt, but those who overdraw their account with a debit card
“lack this protection. A bank can use the right of setoff when a customer
creates an overdraft with a debit card to repay itself immediately when the
customer deposits funds into the account.”[8] Of course, this doesn’t
just cover the general costs, but also the overdraft fees that are applied to
the account.
The report also found that in many
cases, banks allow people to overdraw on purpose when they pay checks that
result in overdrawn accounts, “knowingly permit consumers to electronically
withdraw funds at the ATM or to make purchases at point of sale,” or “pay
pre-authorized debits despite the lack of funds in the consumer’s account.”[9]
In addition to this, banks don’t tell
consumers of better alternatives, from that same report:
For example, Citizens
Bank’s overdraft protection language on its website sells its line of credit or
savings account transfer overdraft protection product as offering ‘convenience
and peace of mind.’ On the other hand, Citizens
Bank sent an addendum to its deposit disclosure in late 2004 describing the
account’s ‘courtesy’ overdraft provisions and informing consumers that
overdrawing a check, ATM or debit card transaction would incur a fee of between
$25 and $33 each, depending on the number of days the account remains
overdrawn. This disclosure did not
inform consumers that they could purchase optional savings account overdraft
transfer coverage for $3 per month or apply for an overdraft protection line of
credit which costs $20 annually, both of which could be more affordable for
consumers.[10] (emphasis added)
It seemed that things would change for the better
in 2010 as the rules regarding overdraft fees changed. Starting in July, banks were
now “required to allow debit card customers to opt-in to overdraft fees rather
than automatically enrolling card users in programs that charge $20 to $30
whenever there are insufficient funds to cover purchases,”[11]
meaning that if one didn’t have the necessary funds to complete a transaction,
their debit cards would be declined at the register. Unfortunately, banks found
a way around this by engaging in bank fee manipulation. Information came out in
August 2010 when a federal judge ordered Wells Fargo “to pay California
customers $203 million in restitution for claims that it had manipulated
transactions to maximize the overdraft fees it charged.”[12]
What occurred was that, rather than dealing with each transaction in the order
it was received, Wells Fargo put through the largest to smallest transactions,
resulting in people paying increased overdraft fees. The very next year, Bank
of America paid out $410 million for the same reasons.[13]
But the bank fee manipulation continued, with Forbes reporting on the findings of a 2012 Consumer Financial
Protection Bureau (CFPB) report which showed that it was still ongoing.[14]
The situation can get much, much worse though. The
Center for Responsible Lending complied a report in July 2013 which found that
while the average banks charges an overdraft fee of $35, some banks “also add a
‘sustained overdraft fee’ once the account has remained overdrawn for several
days. At some banks, this is a one-time additional fee in the $35 range; at
others, it is a fee in the $6-$8 range charged daily until the account balance
is returned to positive” and that while a few banks have put limits on such
sustained fees, it “still [allows] for daily fees in the hundreds of dollars.”[15]
So not only are people’s bank fees being manipulated so that they pay more
money in overdraft fees, but unless they can come up with the money quickly,
the problems worsen.
For all this talk that’s been going on, though, we
still have yet to discuss exactly who suffers from overdraft fees.
In 2008, the FDIC found that “9 percent of checking
account customers bear about 84 percent of overdraft fees” and that evidence
pointed to overdraft fees disproportionately impacting low-income and young
customers.[16] A
CFPB 2014 report reinforced this information as one of the key findings was
that “eight percent of customers incur nearly 75
percent of all overdraft fees” and that “10.7 percent of the 18-25 age group
[have] more than 10 overdrafts per year.”[17]
What effectively occurs with overdraft
fees is that the poor subsidize the rich. In an article for The Economist, it was reported that “according
to the FDIC low income (people who earn less than $30,000) earners are nearly
twice as likely to have paid an overdraft fee”[18]
and that it wasn’t uncommon for many of these low-income people to rack up fees
to the point where they can’t pay them all. When this occurs, banks close the
indebted accounts and it is extremely difficult for people to open accounts at
other banks. They are effectively shut off from formal banking, thus forcing
them to turn to services such as pre-paid cards which “charge for all kinds of
things checking account customers are used to getting for free: loading funds
on to the card, point-of-sale purchases, talking to a customer service
representative, cutting a check”[19] or check cashing which “can
incur an average of 3-5% of the check amount in fees, regardless of the nature
of the check.”[20]
The costs of both of these can easily add up to more than what it would cost to
have a regular checking account.
Alternatives to overdraft fees are asking one’s bank
about a linked line of credit[21]
or an affordable small-dollar loan.[22]
However, the best solution would be to get rid of overdraft fees entirely. By
combating overdraft fees, we will be able to free millions of people from the
worry of debt and its potential long-term effects.
Endnotes
1: Statistic Brain Research
Institute, Overdraft Fee Statistics, http://www.statisticbrain.com/total-overdraft-fees/
2: Andrea Ryan, Gunnar Trumbull,
Peter Tufano, A Brief Postwar History of US Consumer Finance, Harvard
Business School, http://www.hbs.edu/faculty/Publication%20Files/11-058.pdf
(2010)
3: Alex Berenson, Banks Are
Reaping Billions From Stealth Overdraft Charges, Citizen Review Online, http://www.citizenreviewonline.org/jan_2003/banks.htm
(January 23, 2003)
4: Kathy Chu, “Rising Bank
Fees Hit Consumers,” USA Today,
October 4, 2005 (http://usatoday30.usatoday.com/money/industries/banking/2005-10-04-bank-fees-usat_x.htm)
5: Todd J. Zywicki, “The
Economics and Regulation of Bank Overdraft Protection,” Washington and Lee
Law Review 69:2 (2012), pg 1153
6: Jon C. Ogg, Banks Making
The Most From Overdraft and ATM Fees, 24/7 Wall Street, http://247wallst.com/banking-finance/2015/06/17/banks-making-the-most-from-overdraft-and-atm-fees/
(June 17, 2015)
7: Jean Ann Fox, Patrick Woodall,
Overdrawn: Consumers Face Hidden Overdraft Charges From Nation’s Largest
Banks, http://www.consumerfed.org/pdfs/CFAOverdraftStudyJune2005.pdf
(June 9, 2005)
8: Ibid, pg 5
9: Ibid, pg 7
10: Ibid, pgs 7-8
11: Connie Prater, Fed:
Consumers Must Opt In To Debit Card Overdraft Fees, http://www.creditcards.com/credit-card-news/opt-in-fed-debit-card-overdraft-fee-rules-1271.php
(September 13, 2010)
12: Ron Lieber, Andrew Martin,
“Wells Fargo Loses Ruling on Overdraft Fees,” New York Times, http://www.nytimes.com/2010/08/11/business/11wells.html
(August 10, 2010)
13: Ben Popken, Bank of
America Paying Out $410 Million For Reordering Your Transactions To Maximize
Overdraft Fees, The Consumerist, http://consumerist.com/2011/07/14/bank-of-america-paying-out-410-million-for-reordering-your-transactions-to-maximize-overdraft-fees/
(July 14, 2011)
14: Halah Touryalai, “Yes, Banks
Are Reordering Your Transactions And Charging Overdraft Fees, “ Forbes,
June 11, 2013 (http://www.forbes.com/sites/halahtouryalai/2013/06/11/yes-banks-are-reordering-your-transactions-and-charging-overdraft-fees/)
15: Rebecca Borne, Peter Smith, The
State of Lending in America and its Impact On U.S. Households, Center for
Responsible Lending, http://www.responsiblelending.org/state-of-lending/reports/8-Overdrafts.pdf
(July 2013), pg 3
16: Consumer Financial Protection
Bureau, CFPB Launches Inquiry Into Overdraft Practices, http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/
(February 22, 2012)
17: Trevor Bakker, Nicole Kelly,
Jesse Leary, Éva Nagypál, Data Point: Checking Account Overdraft,
Consumer Financial Protection Bureau, http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf
(July 2014). pg 5
18: A.S., “How The Poor Subsidize
The Rich,” The Economist, http://www.economist.com/blogs/freeexchange/2010/08/money_and_banking
(August 2, 2010)
19: Claes Bell, Check Cashing:
Still Not A Good Deal, Bankrate, http://www.bankrate.com/financing/banking/check-cashing-still-not-a-good-deal/
(November 18, 2011
20: Account Now, Check Cashing
Centers: Pros and Cons, http://www.accountnow.com/content/check-cashing/check-cashing-centers-pros-and-cons/
21: Jax Federal Credit Union, Overdraft
Protection: Overdraft Line of Credit & Courtesy Pay, https://jaxfcu.org/checking/overdraft-protection.html
22: Federal Deposit Insurance
Corporation, FIL-50-2007, https://www.fdic.gov/news/news/financial/2007/fil07050a.html
