Customers haven't been happy with their banks ever since the financial crisis, as they've seen their account costs soar even after banks took taxpayer money to avoid financial catastrophe. Overdraft charges are a particularly egregious example of how important fee income has become to banks. In that light, is it smart to trust the services that Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and other banks have come up with to help customers avoid the full brunt of the overdraft fees that they themselves impose?
The problem with overdraft fees
Everyone knows that overdraft fees are high, but the sheer amount of money at stake is staggering. According to the most recent annual study from Moebs Services, bank customers paid a total of $31.9 billion in overdraft fees in 2013. That's less than figures of $32 billion for 2012 and the all-time high of $37.1 billion in 2009, but it still represents a substantial portion of the overall revenue that banks receive from checking-account relationships. That's particularly surprising in light of bank regulations that were supposed to reduce the number of situations in which overdraft fees would apply.
Average overdraft fees per transaction reached a record $30 in 2013, up from $29 in 2012 and $25 as recently as 2008. As revenue from mortgage refinancing activity evaporates, many analysts expect banks to further boost overdraft fees in an effort to make up for lost income if interest rates rise.
Can banks protect customers from bank fees -- with other bank fees?
Interestingly, that has prompted Wells Fargo, JPMorgan Chase, and other banks to implement overdraft protection services designed to help customers avoid overdraft fees through automatic transfers from other bank accounts. These services have fees of their own -- a Wall Street Journal article on the topic cited charges of $12.50 per day at Wells Fargo, while Bank of America cites a $10 transfer fee per day -- but the amount of those overdraft-protection fees looks small compared to the much higher costs of even a single checking-account overdraft.
But banks win twice from overdraft protection services. Not only do they earn fees for providing the service, but they also get another deposit relationship with the customer -- a relationship that often generates fee income of its own through monthly maintenance or other charges.
One question is whether regulators will start to clamp down on those overdraft protection services as well. Last month, the Consumer Financial Protection Bureau actually discussed overdraft protection in a positive context, noting that the absence of the service can make prepaid cards much more expensive for the roughly half of young Americans who overdraw their accounts. Yet arguably, fees for overdraft protection should be much lower than for standard overdrafts, because the bank isn't actually fronting its own money for protection -- it's just using your own money from different sources.
The better answer
The best thing that bank customers can do to pay less in overdraft fees is simply not overdraw their accounts in the first place. For those who aren't completely cash-strapped, keeping a reserve balance in your checking account ensures that overdrafts won't occur. This can also cut your monthly maintenance charges.
Moreover, if you already have multiple accounts at a bank, technology makes it easy for you to handle your own transfers rather than paying a $10 or $12.50 fee to do so. Just by checking on your balance through mobile apps or online resources, you can see a potential overdraft before it happens -- and typically, banks will let you execute transfers before certain times to remedy problems before they produce a charge.
Overdraft fees are high enough that it shouldn't take a competing bank service to solve them. Instead, take control of your own finances and resolve not to get stuck with overdraft fees ever again. The money you save will astound you.
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