Overdraft fees have become news again, largely because of a report from the Consumer Financial Protection Bureau on the subject and the recommendation of other consumer advocates that financial institutions be banned from allowing customers to overdraw their accounts.
That’s because the overdrafts come with fees, which is understandable. But the median fee for the 33 largest financial institutions last year was $34; for 800 smaller banks and credit unions, the median fee was $30.
That adds up pretty quickly, and it’s almost entirely profit for most banks. On average, less than 15 percent of the overdraft fee goes toward covering the overdraft. Almost all of the rest of the overdraft fees — $32 billion last year — was profit.
Even though such policies have been likened to payday loans, it isn’t as if customers don’t have a choice. They do. They could, for instance, be more responsible. They’re not forced to write checks that exceed the balance in their accounts.
For the last several years, banks have been required to invite customers to opt in to overdraft coverage. Trouble is, for too many consumers, being allowed to spend more than they have is like being encouraged to do so. Not surprisingly, consumers who have opted in for overdraft allowance spend hundreds more in overdraft fees a year than consumers who don’t opt in.
The advantage of opting in is that, for example, when someone pays for a dinner date with a debit card, the transaction will go through even if the money isn’t there. That’s convenient and avoids an embarrassing moment. The downside, of course, is that the dinner is $30 or so more expensive.
Folks who don’t opt in to overdraft allowance risk embarrassment at having their debit card rejected, but one senses they’d make sure they have the money in their account. They might not quite “save” the overdraft fee, they just don’t throw $30 away.
A ban on overdraft allowance fees isn’t necessary, though institutions certainly should spell out clearly the costs as well as the advantages. Also, overdraft fees should be lower. Banks deserve to profit from customers’ overdrafts, but the profit shouldn’t be outrageous.
This issue doesn’t start with banks. It starts with consumers for whom self-control is a foreign concept. It’s hard to sympathize with people who bring such misery upon themselves, but their misery might not be so acute were some banks not exploiting their weakness.