Overdraft fees tallied to $32.5 billion at American banks in 2015. But financial regulators aren't always pleased with the practice of billing already stretched consumers for every debit in excess of their current balance.
The Motley Fool's Gaby Lapera and contributor Jordan Wathen they discuss why Banco Santander's (NYSE:SAN) U.S. banking unit, Santander Bank, was hit with a $10 million penalty for aggressively selling overdraft protection to customers who didn't necessarily want to opt-in to the service.
A transcript follows the video.
This podcast was recorded on July 18, 2016.
Gaby Lapera: Just to add to the complexity, Santander has also been trying to build up its consumer financing branches over here in the United States as well. That has gone interestingly for them. I don't know if your mother ever told you this, Jordan, but my mom always says, "If you don't have anything nice to say, don't say anything at all." Barring that, just say that it's interesting. For the U.S., the U.S. division of Santander, they're having a little bit of trouble. Announced, I think yesterday, was that Santander has ... The Consumer Financial Protection Bureau, which I'm going to shorten to CFPB because it's too much of a mouthful to say, has ordered Santander to pay about $10 million in fines for hiring a telemarketer that engaged in deceptive tactics in order to get bank customers to sign up for an overdraft protection program.
Jordan Wathen: Right. It wouldn't be another day if there weren't another bank in the news for being fined by the Consumer Financial Protection Bureau. This unit is called Santander USA Holdings (NYSE:SC), and it's what owns Santander Bank here in the United States. That bank previously operated as Sovereign Bank. They bought it in, I want to say 2006, but don't quote me on that. The $5, $10 million as far as financial results goes is pretty immaterial, probably about less than 2% of allocated profits last year, but it really does, on top of other issues, which I think we'll get to, really shows the problems they're having operationally. Santander got in trouble, basically, with the CFPB because they basically told people to sign up for an overdraft protection program, which would charge them fees every time they made an overdraft on their account.
Lapera: The reason the CFPB cares so much is that typically these overdraft charges, they hurt low-income consumers disproportionately more. They're more likely to overdraft their account, and then the fees that they get charged are going to hurt them a lot more than someone who has a big paycheck coming in every month.
Wathen: Right. Once someone signed up for this, what could potentially happen is they go to the grocery store and overdraft buying something there. They go to a gas station and swipe their card for a tank of gas and make another overdraft, and those fees just add on top of each other every single time.
Lapera: For the most part, a lot of the overdraft problems, stuff that banks had built up as a way to boost their fee income, had been controlled post-financial crisis. Especially, Bank of America was infamous for the fees that it would charge its unsuspecting customers, but they really cut back on that. This is a relic of that era. Still, there's a service, Moebs Services estimates that U.S. banks made approximately $32.5 billion from overdraft revenue alone in 2015, which is not an insignificant amount of money.
Wathen: No, it's not insignificant at all, especially when you consider its basically cost-less. It doesn't cost the bank anything, really, to charge someone an overdraft fee. That almost flows entire to the bottom line.
Lapera: Yeah. It should be pointed out that Santander has severed relations with the vendor of its own volition, and the CFPB has mandated that it contact everyone who is enrolled in the program to make sure that they actually understand what they have signed up for. It's more of a hit to their reputation more than anything else.