More than twenty-five billion dollars in profit are at stake:
A vast majority of financial institutions automatically enroll their customers in “overdraft protection” plans. Simply defined, if you overdraft your account balance, they will cover the overage for you, for an industry average fee, of about thirty-five dollars. With the tremendous growth of debit card transactions in the past five years, this practice adds up to an estimated twenty-five billion dollars in fees collected, industry wide.
Bank of America and JP Morgan Chase have attempted to get ahead in the game, by voluntary revamping their own overdraft fee policies. Changes such as:
- not imposing a fee if the account is only overdrafted by less than five or ten dollars.
- allowing customers to decided if they wish to participate in the program at all
- limiting the number of overdraft fees that can be incurred daily
- posting customers transactions as they actually occur
Overdraft protection is essentially a loan from the bank to the consumer to cover the amount that they have overdrawn on their account. If for example a consumer overdraws five dollars, the bank covers the five dollar charge, then imposes a thirty-five dollar fee, which to many is considered interest on the five dollar loan. In that line of reasoning the interest rate that the consumer is paying is more than one-hundred thousand percent. The banking industry as a whole balks at this way of thinking and insists that the fee is necessary to cover their operating costs, and they also admit is meant to deter consumers from overdrafting.
If the banks do not want consumers to overdraft, then they should allow individuals to decide to whether or not they wish to enroll in such a program. Many consumers would rather just have the transaction declined or rejected, and use another form of payment.
If the banks did not want consumers to overdraft, then they would post transactions to the account as they actually occur chronologically. Many institutions have a practice of manipulating the sequence in which transactions are posted to the accounts in such a manner as to actually increase the probability and frequency of overdrafts. possibly resulting in numerous overdraft fees in the same day.
Little too Late:
Bank of American and JPMorgan Chase may have seen the writing on the wall, but it may prove to be a little too late. The legislation proposed in the United States Senate by Connecticut's Christopher Dodd, head of the Senate Banking Committee, is much stricter than what the banking giants came up with on their own.
Dodd's proposed policy will include:
- limiting the number of overdraft fees to six per year
- force the fee to be proportional with the actual cost of processing the overdraft
- restrict banks from posting the largest transactions first (a practice which typically increases
- the occurrence of overdrafts).
Legislation that has been introduced in the Congress by New York's Carolyn Maloney is even more strict in that it would required the banks to notify the consumer at the point of sale if the transaction would put them over their account balances.
Representatives from the banking industry have since convened on Washington to plead their case and put up a fight to try and hold onto some of the billions that they generate from these types of fees. American Bankers Association is concerned that restricting the fees will lead to an increase in overdraft which will result in higher fees for all types accounts. Rejection of payments would also cause embarrassment and inconveniences. It is also argued that the legislation would cause more reporting of returned checks to credit bureaus.
The fate of exorbitant and covert overdraft fee policies lies in the balance. The consumer is ultimately responsible not to overdraft their account balances, but the financial institutions should not intentionally do things that would cause more overdrafts than would naturally occur. The appears that the middle ground will have to be determined by our governing bodies.