The $36 soda: Overdrafting in America
Once upon a time, banks made money by charging interest on loans. They’d take your deposit, loan some of it out, and use the interest they collected to pay for things like buildings, salaries, and interest on their customers’ deposits. As long as they didn’t lend out too much of their customers’ money, and as long as their borrowers were able to pay the loans back with interest, this worked out fine.
Whether or not you’ve been occupying certain public spaces in the past few weeks, you’ve probably heard the buzz about new and increasing fees for basic bank services. We wanted to do a post outlining a few of the more, ahem, interesting bank fees, but the more we thought about it, the more we realized that each fee deserves specific attention.
First up on the hit parade: Overdraft fees. If you’re one of those financially responsible people who’s never had the pleasure of meeting one, overdraft fees are the bank’s way of saying, “Hi, we noticed you are out of money, so we charged you more money.”
Overdraft fees in America
Bank revenue from overdraft fees reached its peak in 2009. According to a CNN special report, banks collected $38.5 billion from customers who were already in the red. And ninety percent of that total—over $34 billion—came from ten percent of customers. Banks raised their overdraft fees throughout a decade marked by recession, averaging between $25-35 per occurrence. Some banks have variable fees, depending upon the customer’s history and the amount of the overdraft. Of course, there’s no “frequent flyer” discount on overdrafts—banks that typically charge $25 will charge $35 if you’re a repeat offender.
In another 2009 study published in American Economic Review, economists surveyed a small sample of American households to learn how much they spent per month on checking and credit accounts. Here’s how they describe their demographic:
Compared to national averages, our sample uses electronic payments relatively intensively, has typical amounts of revolving debt, and is younger, wealthier, more educated, more likely to manage finances online, and more creditworthy. In short, our sample is likely to be relatively financially sophisticated.
Perhaps not the crowd you’d immediately associate with overdraft fees. Even so, overdraft fees accounted for a significant percentage of annual account costs. The highest percentile of subjects paid more than $42.78 per month—$513.36 per year—in overdrafts. The 75th percentile spent $14.75 per month—$177 per year.
A little regulation
You may remember hearing from your bank last summer, and being asked repeatedly to opt-in to overdraft protection. In November of 2009, the Federal Reserve Board amended their rules to prohibit banks from charging overdraft fees without consent. These rules took effect in 2010, at which point banks launched campaigns to encourage customers to enroll in overdraft services. For many customers, the threat of having a debit card decline at exactly the wrong moment was enough.
The marketing helped, too. If you’ve ever agreed to something that showed up on an ATM splash screen, or simply not said no to a bank customer service rep when you asked about something you thought was a totally separate issue, you can imagine why banks were so successful in keeping customers on board the overdraft train. According to a recent Bloomberg article, a majority of customers enrolled in overdraft protection aren’t fully aware of their options.
A survey by the Center for Responsible Lending showed that 60 percent of consumers who chose overdraft protection did so in part to avoid penalties if their debit cards were denied, even though such fees don’t exist. Similarly, two-thirds said they signed up to sidestep charges for bounced checks, which are covered under different programs.
Banks are on track to record $16 billion in overdraft fee revenue for this year. That’s quite a bit lower than the 2009 numbers that prompted the Fed to change the rules, but it’s still a lot of money from consumers who probably wouldn’t have made that last purchase if they’d known just how much it would cost.
No overdraft fees, please
My name is Mae, and I’m a recovering overdrafter. The last time it happened, I went to my own bank’s ATM and withdrew $10 more than I had. As I left the vestibule, I got a notification on my phone alerting me to my negative balance. After that, I said some bad words.
We’ll be filling you in on our plans for this sort of thing soon. The bottom line is, if you swipe your BankSimple card at a store and you don’t have enough money in your account, the transaction is simply declined and no fee is charged. Makes sense, right? In the meantime, stay tuned for more posts about bank fees! We’ll put them in the spotlight and dig up all the dirt so you don’t have to. It’s like gossip blogging, except that we’re pretty sure there won’t be any tearful “Leave the fees alone!” videos on YouTube anytime soon.
Mae Saslaw is a writer and critic who lives and works in Brooklyn, NY.
The illustration by M.K. Perker for Simple Finance Technology Corp. is available through Creative Commons license (by-nc-nd 3.0).