Overdraft fees, which a large number of U.S. banks and credit unions relied on to turn a profit in 2008, are under a great deal of fire from consumers and Washington alike.
More consumers are turning to their checking accounts for purchases, and this could make for a significant boost in overdraft fees. Charges related to overdrawn accounts this year may add up to $38.5 billion following last year’s $36.7 billion, according to data from research firm Moebs Services Inc.
The shift from credit to debit cards means banks still have another avenue to collect lucrative fees despite legislation signed in May by U.S. President Barack Obama that protects consumers from excessive fees and last-minute contract changes such as interest rate hikes.
“Fee abuse hasn’t disappeared in banking with the credit- card legislation,” Tony Plath, a finance professor at the University of North Carolina Charlotte told Bloomberg News. “It’s just migrated to checking accounts.”
If President Obama gets his way, a new consumer protection agency would be formed and have the power to ban “unfair, deceptive and abusive practices.” This puts the Obama administration , the agency that is currently tasked with regulating such practices.
Overdraft fees, which account for more than 75% of all bank fees, could make or break some banks. Without the fees,, according to Moebs.
“Banks are returning to a fee-driven model and overdraft fees are the mother lode,” Mike Moebs, founder of Moebs Services, said in an interview with the Financial Times.
The largest banks charged the largest overdraft fees: The median fee among banks worth $50 billion or more, including Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC), is set at $33. The median fee among all banks is $25 to $26.
Fees for overdrawing an account can be astonishingly high when calculated as an annual interest rate. For example, a consumer who overdraws an account by $20, repays the bank in two weeks and pays a $27 fee, would be charge the equivalent of a 3,520% annual interest rate according to a study conducted last year by the Federal Deposit Insurance Corp.
Higher fees at bigger banks are appropriate because they do not know their customers as well as smaller local banks, and need to be compensated for the higher risk, Nessa Feddis, general counsel at the American Bankers’ Association told The FT. Consumer advocacy groups reject this, saying that overdrafts are the least risky form of credit, and the most expensive for consumers.
“The banks own your paycheck before you do, so the only way you can default on your overdraft is if you choose to open another account and deposit your income elsewhere,” said Eric Halperin, director of the Center for Responsible Lending.
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- Financial Times:
Banks Make $38bn from Overdraft Fees