What to Do About Bank Overdraft Fees

There's a good debate raging these days on what are being called "criminal" overdraft fees charged by banks when customers overdraw their checking accounts.

As loan losses soared over the past two years, banks turned to fee-based income to juice their bottom lines. This year, banks could pull in as much as $38.5 billion in overdraft fees -- more than double the amount collected 10 years ago, and a number that many have run with recently as evidence that banks are a bunch of hungry, soulless, jerks.

Now a slew of politicians are calling for serious overdraft-fee reform. Sen. Chris Dodd, for example, wants banks to get permission from customers before being stuck with an overdraft fee. "People out there are getting whacked. They should have the right to say, Deny me the transaction," Dodd claims.

Fair enough, but …
Well, OK. People are indeed out there "getting whacked" by overdraft fees, some of which can be quite large. Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) can each charge at least $34. Most of these fees can be accumulated several times a day, and many take place whether a customer asks for overdraft protection or not.

But a few points need to be addressed before we completely cast bankers off as gluttonous blood-suckers.

It's true that consumers should have the right to opt out of overdraft protection, as Dodd proposes. But what everyone already does have the right to do is simply not overdraw their account to begin with. It's really simple: Spend within your means, and you have nothing to worry about. These fees come about solely because of actions people choose to take.

And, really, since customers are spending more money than is in their accounts, these aren't "fees" for service. They're punishments for screwing up, just like the fees you expect for not paying your taxes, forgetting to pay your phone bill, or being drunk in public. I'd love to be able to opt out of getting parking tickets when I forget to move my car on street-cleaning days, but someone feels it's necessary to charge me $74 for doing so. That's just how life works.

Furthermore, Dodd would be wise to look into who exactly these people "being whacked" are. A recent survey by the American Bankers Association that many have pointed to shows a full 82% of consumers haven't been charged an overdraft fee in the past 12 months. Of the 18% who have, 64% had more than one overdraft fee charged in the past year. Amazingly, 54% of the group had more than three overdraft fees charged, and 16% had more than six. That isn't banks being greedy; it's customers being irresponsible.

Point being, a very small, isolated group pays the overwhelming majority of overdraft fees. And since so many in this group are repeat offenders, we can only guess that they're actually OK with the fees: When a customer continuously overdraws and gets stuck with fees, they obviously think the overdraft, fees included, is worth their while. Indeed, only 4% of those charged an overdraft fee were upset that the payment was covered. I'm willing to bet that that's among the highest customer satisfaction rates of any bank product out there.

There are such things as good fees
Want to see what really disturbing fees look like? Check out the underwriting fees investment banks like Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) charge companies in need of capital. Plus, that's a fee that gets passed down to everybody whether we like it or not, as companies pass along their cost of capital to customers.

Most importantly, regulators want banks to stop making risky loans, yet simultaneously rebuild capital levels. Charging fees for service, and penalizing customers who abuse that service, is the most logical and responsible way to do that.

Got your own overdraft charge story? Fee free to share it in the comment section below.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

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  • Report this Comment On September 22, 2009, at 1:00 PM, SteveTheInvestor wrote:

    I suppose I can understand how overdrafts occur. I did it once myself, about 30 years ago (math error). But you are correct in stating that the repeat offenders basically deserve what they get. If you keep bouncing checks, you keep paying fees.... simple as that. Not that difficult to understand.

  • Report this Comment On September 22, 2009, at 1:37 PM, Jazbone wrote:

    There's a fine line between "irresponsibility" and "survival."

    Try factoring in these all too real scenarios:

    A divorce and all the financial implications (alimony & child support). So throw out any savings you had...cause you used that to start all over again while supporting two households...

    The company you work for goes bankrupt and you get no severance. The 6 weeks of vacation time you had stored up became 1-1/2 weeks during the court preceedings.

    Out of work for 3 months, finally got a job, but it's 50 miles away. So for the first few months, you struggle to keep enough gas in your car while keeping it from being repossesed, and food on the table while still trying to make payments on the apartment & utilities, child support & alimony, etc. Waking up every morning and praying that front left tire that's showing threads can make it one more day with out popping or that the cops won't notice that you are late on your car registration...

    Sometimes you don't have the choice of NOT overdrafting to get to the next paycheck. Especially when you HAVE to pay your cell phone bill just so you can communicate with the folks on Craig's List as you sell the last of your valuables to try and get out of the hole that keeps filling up as you try and claw your way out.

    There's a myriad of other variables in this scenario like getting evicted twice in a year because the house you are renting was foreclosed by the 'stated income' & "ARM" homeowners...but I'm sure you get the picture...

    Sometimes being responsible isn't an option. Sometimes things are just beyond your control.

    Perhaps banks should tier the fees based on customer longevity. A ten year customer with a good record should get some leniency you think? Not $34 fees for EVERY overdraft transaction, plus $6 for every day it's overdrafted.

    The more Dodd and the others try to legislate these banks, the more creative they will get. The banks will ALWAYS be one step ahead of the legislators.

  • Report this Comment On September 22, 2009, at 4:41 PM, brubumski wrote:

    Sounds like a banker wrote this article and all overdrafts are made by losers...How about overdrafts when deposits are made during the day and posted the next or after the check clears and subsequent withdrawals prior to clearing are charged as overdrafts.

    And when withdrawal fees from other banks aren't posted till the end of the month and then overdrafts are applied is sufficient balance isn't available?

    and the comment "we can only guess that they're actually OK with the fees" - instead of guessing, you might try taking a survey. My guess is that you are wrong!

  • Report this Comment On September 22, 2009, at 4:51 PM, TMFHousel wrote:

    brumski,

    Thanks for your comments.

    Nope, not a banker. Never worked at a bank. Never plant to.

    "How about overdrafts when deposits are made during the day and posted the next or after the check clears and subsequent withdrawals prior to clearing are charged as overdrafts."

    You can spend the money after the check clears, and not before it. Follow that rule, and you'll be A-OK.

    "and the comment "we can only guess that they're actually OK with the fees" - instead of guessing, you might try taking a survey. My guess is that you are wrong!"

    I noted the survey results in the sentence after the one you quote. In a survey of 1,000 people, only 4% of those charged an overdraft fee were upset that the purchase was covered.

    Thanks again,

    Morgan

  • Report this Comment On September 22, 2009, at 4:52 PM, TMFHousel wrote:

    Sorry, that's "never plan to."

  • Report this Comment On September 22, 2009, at 5:11 PM, outoffocus wrote:

    It is because of the usurous fees that I don't like using big banks. Though I agree with the overall article, I also agree with brumski. Which is why I no longer do my main banking through a major bank that got a big bailout last year that I will not name.

    My overdraft story:

    Basically I was in college and I had $5 and some change in my checking account. The atm in college allowed me to withdraw $5 increments (no atm fees). So I withdrew $5 out of the account. The resulting $1 atm charge from MY bank ended up overdrawing the account. Thankfully I didn't get an overdraft charge however I did get a letter in the mail from the bank stating that my account is overdrawn by 42 cents and I need to fund the account ASAP or they will send me to collections. I was like seriously? 42 cents?

    So now I bank primarily with a credit union and don't have to deal with most of the nonsense people deal with at these big banks.

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