How The Banking Industry Wants You To Think About Overdraft Fees

Earlier today, a public relations person sent in the following suggested “follow up” story about the explosion in overdraft fees. She was quite friendly and complimentary and made it clear she just wants to help educate consumers about banking fees. The only problem is, the entire story is a jumble of propaganda designed to spread FUD about any attempt to change current overdraft policies. We figured it might be fun to see how the banking industry wants you to think.

Here’s their submission, along with some of our own reactions:

Checking Account Fees Will Soon Replace Overdraft Fees

From the very beginning, they attempt to reframe the issue as a scary story of unintended consequences: “If you force us to change our business model, it’s gonna cost ya!” The headline is a threat, warning consumers that current “optional” overdraft fees will be replaced by mandatory fees.

B of A, Chase and Wells all announced changes to their overdraft polices. While this is great publicity, how will banks make up the lost income from overdrafts?

This is like asking how a hospital can make up lost income after it’s been forced to stop selling the organs of the homeless population. If your current business model relies on exploiting certain groups—and overdraft fees come primarily from the poor and the young—then maybe you need to rethink your business model.
Or who knows, maybe they really want you to answer because they don’t have any idea how to make legitimate profits.

Have you ever wondered how the bank can afford to give you a free checking account? If you think they make all their money off of the interest of your account balance, think again. The average bank’s margin is less than 4%. If you were to keep $1,000 in your checking account on average that would mean the bank would make $40 per year off of your money. The average bank branch has about 1,300 checking accounts, so amongst all the checking accounts they would make $52,000. That doesn’t pay for two branch tellers, let alone all the overhead of operating a bank branch. So where does the money come from?

Frankly, we don’t understand how banks and credit unions existed before the current overdraft fee boom began in the first part of this decade. Clearly they never managed to make any sort of profit before they stumbled across the current scheme.

According to our analysis of FDIC data, the banking industry brought in a whopping $29 billion last year in overdraft fees. What will replace the income lost from the recent changes announced by the big banks? After all, the industry required huge bailouts last year, so it isn’t as if there is excess income lying around.

What floored us about this line of reasoning is they seem to be saying that because current banking business models are flawed, they must be sustained; if it’s broke don’t fix it, we guess.

The most likely source to replace that income is for banks to begin charging for services that were once free. Possible examples include charging for bill pay services, checks, debit cards or certain types of debit card transactions. They will also likely begin requiring minimum balances on certain products.

Translation: If you force banks to treat their customers fairly, you will be treated unfairly. Your investments will be siphoned off by a creaky old bank that can’t afford to pay its electricity bill now that abusive overdraft practices have been reined in. You will hurt the bank, and the bank will hurt you in return.
But here’s an idea: some banks will innovate and find ways to offer services for low prices, or for free, in order to maintain a competitive edge. Other banks will find ways to bundle services so that profitable customers won’t have to pay fees.
And of course customers who screw up will still pay overdraft fees; so far as we know, nobody is calling for the practice to be banned outright.

Finally, we may again see the day when most people pay a monthly fee for their checking account. Thirty years ago the average American consumer paid a monthly fee for their checking account – it may be 1980 all over again.

The current “free checking” system works well for 3/4’s of the population – after all, they don’t pay any overdraft fees. In reducing the fees paid by the other quarter of the population, the majority will likely have to take up the slack.

Here the PR agency goes straight for the appeal to selfishness: “If we can’t keep charging overdraft fees the way we currently do, then you will have to pay for freeloaders.”
In reality, it’s the exact opposite. Those “freeloaders” have been forced to foot the bill for your free banking services for a while now. And if in the future you accidentally (with the bank’s help by reordering transactions on your account) trigger an overdraft avalanche, then congratulations. You’ll be paying for those so-called free services as well. It’s like winning a really frakked-up lottery.
If you don’t feel like you should be “punished” by others who feed the overdraft revenue machine, then the answer is simple: you should bank where all fees to manage your account are charged directly to you.

“Banks Cling To Overdraft Fees Because They Need Them To Survive”
“Overdraft Fees Up 35% In Past Two Years”
(Photo: Ralph Hockens)

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