While I think overdraft fees are gross and exorbitant (and I fell at their mercy a few times before I finally wizened up and got overdraft protection), I don't really think this is that big of an issue (at least, compared to other issues in the banking system.) It's a pretty solvable problem from the consumer end -- don't spend money on a card if you're not sure you have at least X in your account.
This is needlessly burdening the customer, which in my opinion is the textbook definition of bad customer service. The days of hand-written checks in the consumer space are largely gone; and the bank knows at any given moment what the customer's current account balance is and which transactions are pending. Permitting a card-based withdrawal or debit request that the bank already knows is likely to result in an NSF at settlement time is both misleading and adversarial to the customer.
This entire issue would grind to a halt immediately if banks properly denied debit requests when permitting them would yield an NSF.
This can get a little tricky though... I have two bank accounts, one which is my monthly spending and one which is my emergency fund. Because of this I transfer surplus money out of my monthly spending account so that what I have in there is just my budget, forcing me to stick to it. Unfortunately sometimes this causes me to overdraft because of a payment I forgot about (a few months ago it was eBay seller fees, first time in a year I sold something on eBay) or because some credit transactions won't show up for a day or two.
Of course this is still easy to solve by monitoring your account and knowing where you stand plus keeping a buffer. Since I like to keep my main spending account set with just my monthly budget I get around it by having a small overdraft line of credit. The 8% interest on that is a lot cheaper than the $40 overdraft fee and usually if I use it it's only because I'm over by a few dollars.
Overdraft fees are absurd, but so is complaining about them. Just go to your bank and ask them to disable overdraft. If you don't have the money and overdraft is disabled, the transaction will simply be declined. If you want to spend money you don't have yet, you can do it the normal way, by borrowing.
So, that seems like a reasonable answer, but historically that wasn't sufficient for me. When I was an HSBC customer in college a few years back, I had disabled overdrafting because I did not want to receive overdraft fees and, in a pinch, I could use a credit card if my charge was declined.
One day I checked my account and discovered that I had accrued a number of overdraft fees. Apparently sometimes merchants (namely gas stations) will put a temporary charge of a dollar against your credit card, then later correct the charge to the correct price. This caused my account to overdraft as HSBC didn't deny the correction, then with my account overdrafted as of the date in question, all subsequent valid charges I had done against the account assuming a one dollar gas charge were made as overdraft charges. Contacting customer service and reminding them that I had in fact disabled overdraft was not enough to convince them of anything other than giving me a one-time partial credit of fees, so I switched banks.
I don't know if that is still how things are done over at HSBC, but ultimately the point is that disabling overdrafting is not some panacea for the problem, as ultimately there are situations that can still get you in trouble.
The graph in the article suggests the bank's cost for a checking account per year is $250. Wow. That seems like a huge opportunity to provide better banking service. Driving that cost down to $100 or so would be a very big deal.
According to the CFPB, The banking industry charged a total of $32 billion in overdraft fees to consumers in 2012, an increase of more than 60% from $19.9B in 1990. Part of this increase is that banks have been turning the screws on consumers, increasing the average overdraft fee from $27 in 2007 to $34 today.
Those fee increases would be more acceptable if they went to cover the costs associated with those transactions. Unfortunately, this is not the case. Only 14% of the average fee goes toward the cost over covering the overdraft, meaning that 86% of the average overdraft fee is pure profit for the bank.
Collusion sucks and keeps the amount that consumers shell out unnaturally high. Anybody that would compete on price gets bought, eventually, by one the big banks (Chase, BoA, Wells Fargo, etc) because they're just buying customers. Your small-town bank that offered cheap checking gets bought by big bad Chase and now you have to pay $35.00 for overdrafts, ad nauseum.
Something similar is happening right now with collusion between payments processors (like WePay, Stripe, Balanced) and those same big banks regarding Interchange, "processing fees", etc. The Durbin Amendment, which the author mentioned briefly (but with an outdated reference) was a start in the right direction but there's still a long way to go. More on the Durbin Amendment: http://ink.hackeress.com/2013/08/its-time-for-price-war-in-p...
Banks have a lot of overhead. Typically, they do not write their own software - they buy a package (and spend nearly as much time/money writing integration code, but that's a separate topic.) There's also mandatory costs -- SOX says you must have a disaster recovery plan in place, and you must conduct regular tests. You must have access controls in place, which includes things like mandatory vacation time for sysadmins and developers (so they can't write backdoors into the systems).
Customers not having access to their funds because of system problems is highly frowned upon by regulators, so high-availability with redundant computers + software is a given. Passing a SAS-70 audit is just the beginning.
Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account.
I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a year because I have 1000 in my account.
The magic of fractional reserve banking. If I've misunderstood this, I'd very much like to be corrected, please.
I don't think it quite works this way... if you deposit $1000, the bank isn't required to keep $1000 on hand, so with your 1/30 ratio, it means they would hold onto about $34 and loan out the rest with interest.
Yes, and to add to that, credit card companies do not want you to pay your balance off in full every month, because even though they get a 2-3% cut of every credit transaction from the merchant, interest is still how they make most of their money. I have heard that within the credit card industry, they even colloquially refer to such responsible cardholders as "deadbeats!"
In the 8 years I have owned a Credit Card I have never waited to pay off the full balance. I also get the cash back (0.5% - 1% and 1% - 5%) which isn't a lot, but an instant discount on all purchases. Credit card companies will only make money off of my transactions.
Interchange fees would have to be much higher if they were a larger percentage of a credit card company's revenue (as they are for AMEX). This would end up resulting in higher costs for consumers.
[+] [-] jmduke|12 years ago|reply
[+] [-] otterley|12 years ago|reply
This entire issue would grind to a halt immediately if banks properly denied debit requests when permitting them would yield an NSF.
[+] [-] chadcf|12 years ago|reply
Of course this is still easy to solve by monitoring your account and knowing where you stand plus keeping a buffer. Since I like to keep my main spending account set with just my monthly budget I get around it by having a small overdraft line of credit. The 8% interest on that is a lot cheaper than the $40 overdraft fee and usually if I use it it's only because I'm over by a few dollars.
[+] [-] mbateman|12 years ago|reply
(Also, flagging the article.)
[+] [-] tyree732|12 years ago|reply
One day I checked my account and discovered that I had accrued a number of overdraft fees. Apparently sometimes merchants (namely gas stations) will put a temporary charge of a dollar against your credit card, then later correct the charge to the correct price. This caused my account to overdraft as HSBC didn't deny the correction, then with my account overdrafted as of the date in question, all subsequent valid charges I had done against the account assuming a one dollar gas charge were made as overdraft charges. Contacting customer service and reminding them that I had in fact disabled overdraft was not enough to convince them of anything other than giving me a one-time partial credit of fees, so I switched banks.
I don't know if that is still how things are done over at HSBC, but ultimately the point is that disabling overdrafting is not some panacea for the problem, as ultimately there are situations that can still get you in trouble.
[+] [-] gbhn|12 years ago|reply
[+] [-] shawnee_|12 years ago|reply
Those fee increases would be more acceptable if they went to cover the costs associated with those transactions. Unfortunately, this is not the case. Only 14% of the average fee goes toward the cost over covering the overdraft, meaning that 86% of the average overdraft fee is pure profit for the bank.
Collusion sucks and keeps the amount that consumers shell out unnaturally high. Anybody that would compete on price gets bought, eventually, by one the big banks (Chase, BoA, Wells Fargo, etc) because they're just buying customers. Your small-town bank that offered cheap checking gets bought by big bad Chase and now you have to pay $35.00 for overdrafts, ad nauseum.
Something similar is happening right now with collusion between payments processors (like WePay, Stripe, Balanced) and those same big banks regarding Interchange, "processing fees", etc. The Durbin Amendment, which the author mentioned briefly (but with an outdated reference) was a start in the right direction but there's still a long way to go. More on the Durbin Amendment: http://ink.hackeress.com/2013/08/its-time-for-price-war-in-p...
[+] [-] chiph|12 years ago|reply
Customers not having access to their funds because of system problems is highly frowned upon by regulators, so high-availability with redundant computers + software is a given. Passing a SAS-70 audit is just the beginning.
[+] [-] EliRivers|12 years ago|reply
I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a year because I have 1000 in my account.
The magic of fractional reserve banking. If I've misunderstood this, I'd very much like to be corrected, please.
[+] [-] zinkem|12 years ago|reply
I am definitely not an expert on banking.
[+] [-] kyllo|12 years ago|reply
[+] [-] ndcrandall|12 years ago|reply
[+] [-] dev_jim|12 years ago|reply
[+] [-] unknown|12 years ago|reply
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