Column:: Enough is enough. Let’s abolish overdraft fees
Bank fees have gotten way out of hand — so much so that they now account for more than a third of revenue for an industry that once made its cash almost exclusively by lending money to customers.
And the worst of the worst are overdraft fees. They’re little more than cash grabs, serving no purpose but to fatten bankers’ already bulging pockets.
It’s time lawmakers put a halt to the practice. Or, barring that, we should follow the example of Britain, which just placed limits on how much can be charged by banks for exceeding available funds.
“Banks have turned overdraft fees into a revenue-generating machine,” said Rebecca Borné, senior policy counsel for the Center for Responsible Lending. “It’s going to take comprehensive regulatory reform to change this.”
She added that when it comes to a practice so lucrative for banks, “they’re not going to let go of it without some kicking and screaming.”
I bring up bank fees because Discover announced this week that its online bank will no longer charge fees for insufficient funds, excessive withdrawals, falling below minimum balances and stop-payment requests on any of its checking, savings, money market and CD accounts.
“As a next step in evolving our deposit products, it made sense to completely remove our account fees,” Arijit Roy, vice president of deposits at Discover, told me. “We want our customers to know that we are listening to them.”
That customers-first sentiment runs contrary to the prevailing wisdom at many large banks.
According to the Federal Deposit Insurance Corp., commercial banks and savings institutions posted nearly $205 billion in net operating revenue over the first three months of the year, up 3% from a year earlier.
More than $65 billion of that income came from “non-interest” sources — which is to say, for the most part, fees.
U.S. banks are now on track for another record year of financial gains. They enjoyed $237 billion in profit last year, including more than $28 billion from the Republican tax cuts.
Which is to say, they’re doing just fine, thank you very much.
Discover, as an online bank, has less overhead than bricks-and-mortar rivals such as Bank of America and Wells Fargo, giving it greater latitude to cut fees.
But Discover also seems to have recognized that the industry’s reliance on fee income has gone too far, representing an indefensible financial burden for many customers, particularly those living paycheck to paycheck.
“We have studied the market carefully and have seen that fees are a cause of significant friction, with a lot of negative sentiment around them,” Roy said.
Along with eliminating a host of fees, Discover said it will offer checking and savings accounts with no monthly maintenance charges, as well as free orders for checkbooks and replacement cards.
Needless to say, the bank won’t lose any money treating its customers more respectfully. It might not make as much money as before, but it appears to be gambling that attracting new customers will help offset any revenue declines.
The banking industry doesn’t have a monopoly on annoying fees. My absolute, all-time favorite dumb fee is the roughly $2 a month most telecom companies charge to not publish your number in phone books and not include you in their directory databases. The ridiculousness of this fee is underlined by the fact that phone and cable companies charge it on a recurring basis, month after month, even after your privacy preference has been recorded.
Some of the ways banks routinely show their contempt for customers include charging a fee if your account doesn’t show sufficient activity over a given period, and even hitting you with a fee just to close your account.
The industry defends overdraft charges by saying many people appreciate not having checks bounce or payments declined, and there’s a cost to providing such a service.
The thing is, though, it’s well within banks’ power to prevent customers from spending money they don’t have.
Many banks slap customers with a charge of $35 if they exceed available funds in their checking account — even just by a buck or two.
So that $3 latte at Starbucks can end up costing about 1,000% more if your checking account is a little light.
By law, banks are required to get customers’ permission before levying such charges, meaning that you’re supposed to opt in before overdraft protection will be provided. But consumer advocates say banks often hide such approvals amid other transactions, causing many people to inadvertently sign off on overdrafts (and accompanying fees).
Banks pocketed more than $34 billion in overdraft fees in 2017, according to market researcher Moebs Services. And the Trump administration has said it may revisit current rules for overdrafts, potentially making it easier for financial institutions to charge the fees.
Some Democrats see the issue as a political winner. Rep. Carolyn Maloney (D-N.Y.) says she plans to reintroduce her Overdraft Protection Act, which would limit the number of overdraft fees that could be charged and require that such fees be “reasonable and proportional.”
“No $2 cup of coffee should cost $35,” Maloney told me.
Some big banks, including BofA and Chase, offer accounts without overdraft protection for debit cards and online payments. But hefty fees can still be charged for bounced checks and automatic payments.
How about this instead: No overdraft protection at all.
How about: If a customer doesn’t have enough money in his or her account, the transaction doesn’t go through. Period.
Yes, that could cause hassles if we’re talking about a rent check or a similarly important payment. The onus would be on consumers to manage their finances responsibly — a lesson that a single bounced rent check would teach very effectively.
Or we could do what our friends across the Atlantic are doing. Britain’s Financial Conduct Authority has introduced new rules, taking effect next April, that will eliminate fixed fees for overdraft transactions.
Instead, banks will treat overdraft protection as mini-loans with a simple annual interest rate that would amount to pennies a day.
“The overdraft market is dysfunctional, causing significant consumer harm,” FCA Chief Executive Andrew Bailey said in a statement.
Things are no less severe on this side of the pond. Borné at the Center for Responsible Lending said lower-income people are particularly vulnerable to overdraft charges. “This is the worst possible thing to inflict on such people,” she said.
Banks aren’t hurting for cash. They don’t need to gouge customers in this way.
They do it for one reason only: greed.
It’s time for an intervention.