A recent report from Moebs Services revealed some good news for banks: Despite legislation designed to limit overdraft fees by making them more transparent, banks racked up fees totaling $32 billion last year. Unsurprisingly, the largest banks were found to charge the most for this service. However, another very enlightening piece of information came out in the study, as well -- the fact that many overdraft users rely on payday lenders to cover overdrafts, since they actually charge less than banks for short-term lending.
Overdraft fees: more common than you think
After banks like JPMorgan Chase(JPM 1.41%), Bank of America(BAC -0.61%), U.S. Bancorp (USB 0.57%), and PNC Financial (PNC 0.67%)were forced to stop ordering check transactions to maximize overdraft charges, income dropped. Banks found other ways to increase revenue, and though last year's number represents a drop from the all-time high of $37 billion in 2009, it's still 1.3% higher than reported fee revenue for 2011.
The study notes that approximately 26% of checking account holders commonly overdraw their accounts. Of those consumers, more than half utilize payday lenders to cover the overdraft, rather than pay the bank. Why? Because, amazingly, it is cheaper to pay roughly $16 to borrow $100 from a payday lender to cover the overdrawn amount than it is to pay the $30-$35 that the typical large institution charges in fees.
Bank payday loans, debit cards help fuel fees
Banks have bumped up revenue by dabbling in payday-style lending themselves. According to the Center for Responsible Lending, U.S. Bancorp offers a product called Checking Account Advance, and Wells Fargo (WFC -1.21%) names its offering Direct Deposit Advance. Regions Financial (RF -1.40%) and Fifth Third Bank (FITB -0.54%) also pitch such loans, which are generally limited to online customers with direct deposit. These loans often sport an annual percentage rate somewhere between 225% to 300% for a 12-day term. Last year, Fifth Third was sued by customers claiming the interest rates on its Early Access loan program violated federal and state laws, and it was more recently cited in another lawsuit over the same service.
Debit cards are also bringing home the bacon, despite the legislated restrictions on so-called "swipe fees." Banks have merely stepped up the marketing of these products, attempting to make up the difference in volume. Additionally, banks are encouraging current debit card customers to make more use of their cards -- since the bank makes money on the frequency of transactions, rather than purchase size.
Will the Consumer Financial Protection Bureau make good on its pledge to investigate -- and possibly regulate -- these loans? Perhaps, and that may give some low-income consumers, upon whom this type of burden typically falls, some relief. It may also stifle a little of those big fee revenues, too -- but, if past practice is any indication, banks will find a way to make it up, somehow.