As Fewer People Overdraft, Banks Are Raising Overdraft Fees

If you’re still opted-in to overdraft “protection” — which protects you by slapping huge fees on every purchase you make beyond the available funds in your account — you should probably opt out, as the costs associated with this lucrative system are on the rise.

Since 2010, debit card overdraft protection has been opt-in only, meaning checking account customers have to actively join the program.

While banks have done their best to hide this fact or provide misinformation — like “overdraft protection protects you from bounced-check fees” — to consumers, many have just said no to it, and some folks have just become more conscious of what money they have so they don’t have to worry about overdrafting.

What that means, alas, is that the banks are making slightly fewer billions every year from overdraft fees than they were before. So what’s a bank to do? That’s right — raise the fees to balance things out.

The Wall Street Journal reports that while the average yearly number of overdrafts per account has dropped from 9.8 in 2009 to 7.1 in 2012, the median overdraft fee per transaction has increased during that time from $26 to its current record-high of $30, with some banks charging upwards of $50 per transaction beyond the overdraft line.

Additionally, some banks are selling slightly less-expensive alternatives to standard overdraft protection. Like the Wells Fargo service that allows a Wells customer to link two accounts at the bank so that if one is overdrawn, the money can be transferred out of the other. For this, the bank charges a fee that is only about one-third of its usual $35/transaction overdraft fee.

In defense of overdraft protection, one attorney in Arkansas tells the Journal that he is fine with being hit with more than a dozen $17.50 charges per year for his overdrafting, saying he’d rather pay the fees and know that his bills are getting paid.

But wouldn’t it make more sense for him to put those purchases on a credit card? We’re assuming that he means he generally has the money to pay his bills but that sometimes things get screwy and he overdrafts. If that’s the case, then putting them on a credit card that is paid off in full every month would save him hundreds of dollars a year. Just a thought.

The Consumer Financial Protection Bureau has been looking into overdraft fees since last year. It estimates that some 60% of banks’ fee-based revenue comes from overdrafts.

In an effort to see whether fees charged by banks are in line with the actual costs for providing services, the CFPB has asked larger financial institutions to provide detailed breakdowns of where their fees come from. However, the larger banks are putting up a fight because the current CFPB proposal exempts banks with less than $1 billion in revenue from the reporting requirement.

The bigger banks say that’s unfair because it’s the smaller, mom-and-pop banks that are more reliant on fees for their total yearly revenue. Meanwhile, medium-sized banks are putting up a fuss claiming that the exemption threshold should be at $10 billion, allowing them to get out of disclosing this information.

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  1. furiousd says:

    I had an idea while reading this: I believe there was an article a short while back stating that physical bank locations were become less useful over time as more people doing banking online. What if, to save costs in buildings, labour, etc. you instead had banks set up like an indoor mall (hey, even to help out failing malls their existing empty space could be adapted for use) with stations for each bank with just a teller or two each. Security costs could be divided among the participating banks in the area, and a single vault could be shared. The total operating cost per bank would be less and there wouldn’t be such a push to handle the ‘problem’ of consumers being more responsible. Patent pending, all rights reserved.

    • SingleMaltGeek says:

      It’s a great idea…and here’s why it will never happen.

      The banks would have to admit that, like gas stations, other than slight numerical differences in cost and customer service, they all really offer the same thing. (I believe many gas station brands even purchase from the same refineries, IIRC.) That would mean they could fire all their marketing people, saving a lot of money but also probably losing most of their business to their competitors in the mistaken belief that people just want low prices and don’t care about brand reputation or “personality”, as the marketing people like to call it.

      Me, I am hoping that raising overdraft fees might make those who have been the victims of them the most pay a lot more attention, and so reduce the incidence of them among what previously would have been their core market. tl;dr version: I hope it’s the start of a death spiral for these predatory fees.