Banks Still Raking In the Profits from Overdraft Fees

We now know that things worked out differently. As economist Michael Moebs, CEO of Moebs Services, puts it: "Despite regulation and legislation ... consumers' use of overdrafts shows no indication of going away." Moebs says the latest increase is fueled partly "by increases in consumer demand." But Moebs own report shows that this isn't the case. In reality, the total number of overdraft fees actually dropped by 1.4% last year. The increase in revenue happened, instead, because banks and credit unions continued to jack up fees, with the average cost per overdraft rising by 3.6%.

What the report really shows is exactly what federal regulators and consumer advocates have predicted for years: High overdraft fees are pushing millions of Americans out of the banking system entirely and into things like payday loans, which have significantly higher cost and significantly lower protection for consumers. In fact, according to an FDIC report, overdraft fees are the leading cause of involuntary bank account closures. And while it's scandalous enough to see how much money the banks are pulling in through these fees, the bigger scandal is where this money is coming from. Then and now, these fees have fallen disproportionately on the people least able to pay them: seniors, the young, minorities, the disabled, and military families. This is intolerable. It must be stopped.

The Fed's 2010 opt-in rule was a good first step. But banks have figured out ways around it to keep their pipeline of easy money flowing, with no regard for how much it hurts consumers --- or which consumers get hurt. Here are some suggestions for how federal regulators can create more protection for consumers and staunch the flow.

• Ban all overdraft fees on debit card and ATM transactions. These transactions can easily be declined at the point of purchase, at no cost to the consumer. The only reason for doing it the way we do it now is to shovel more money into the banks' coffers.
• Lower fees, and make them proportional to the amounts involved. The average large bank charges $35 per overdraft. That's ridiculous. It simply does not cost banks $35 to extend a short-term loan to a customer --- especially since most transactions are for extremely small amounts. Rather than being a profit center for banks, overdraft fees should be proportional to banks' actual costs, just as the FDIC requires of penalty fees on credit cards.
• Overdrafts by paper check cannot be automatically declined. If a customer incurs six such overdraft fees in 12 months, they should be given the option of paying off those short-term loans (which is what an overdraft fee is) in installments.
• Ban payment chicanery. Many banks and credit unions have stopped processing purchases and ATM withdrawals as the transactions happen. Instead, they post the biggest transactions first, hoping to drive customers over the limit. This must end. Customers have the right to expect that their transactions are being processed as they are made, and that they are not being forced into paying high fees by bank trickery.
• If banks want to extend credit by way of overdraft fees, they need to tell customers exactly what the APR is on each short-term loan.