Since the banking ‘meltdown,’ one area of increased concern for consumer advocates is whether the fees charged by the banking industry for overdrafts on bank accounts are unfair and deceptive. Often times consumers believe that they are acting in their best interests by carrying only ATM/Debit cards rather than high interest-bearing credit cards, only to find that their accounts has overdrawn and hundreds of dollars in overdraft charges have been charged to them. This scenario is outlined in a recent NY Times article on consumer credit overspending (http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html?_r=2&ref=business).
Historically, banks would quickly deny an ATM withdrawal if the customer’s account did not have sufficient funds in it to pay for the charge, but no longer. This shift occured when the banking industry realized what a lucrative money maker ATM fees can be. Today, banks see that there are substantial overdraft fees to be earned by processing payments beyond the balances in depositors’ account. This ‘untapped’ cash cow earns banks fees to the tune of $27 billion annually. The banking industry’s defense is that it is providing customers with a tremendous service by covering customers’ debts. This ‘service’ provides peace of mind for customers and prevents highly embarrassing situations if the purchase is declined at the point of sale. The problem with this line of thinking is that while overdraft protection may be helpful, the majority of consumers never requested it and had no knowledge of how high these fees would be until they happen. The average overdraft fee is $34. These charges are buried in the fine print a customer signs when the account is opened and it will be too late once the damage is done.
What options are available to consumers? First, a consumer can arrange for overdraft protection on his/her account which will in effect attach a credit card to whatever overdraft occurs. When an account falls below $0, a line of credit is used from the credit card attached to the account and no overdraft fees will be incurred. The customer could then pay this balance off quickly to avoid interest charges from accumulating. Consider that even a 30% credit card interest rate would be far cheaper than what the overdraft fees are currently costing consumers. If a bank charges $34 in overdraft fees for a $6.00 purchase, the interest rate is actually much higher than the 500% interest rate some payday lenders charge. Second, the consumer needs to be educated with regard to the various fees and charges associated with his/her bank account. What may have been in place when an account was originally opened has more than likely changed over the years. Take the time to review your account’s features and ‘benefits’ and know what the rules are in this new banking game. Third, remember that it is your responsibility to watch your account balances and ensure that adequate funds are available in the account to cover all outstanding charges.
Banks have tried to justify these fees by claiming that their financial well-being is dependent on being allowed to charge such amounts. This is basically an admission that these fees are pure profit, and not calculated to compensate them for administrative overhead. The notion that Congress should permit these outrageous fees because the financial well being of these banks will be imperiled if they don’t would be laughable if it didn’t have such real consequences on the consumer. The banks apparently subscribe to a “reverse” Robin Hood tale in which it is O.K. to steal from the poor to give to the rich. Our government officials need to work to change this line of thinking. The only thing “trickling down” to the little guy by favoring ‘big business’ are more financial problems. Consumers have enough financial obstacles of their own and don’t need to be the ones to continue to ‘bail out’ these banks. If some banks go out of business because they can no longer gouge the consumer, the problem with that is what exactly?
These kind of back-end banking charges will continue until Congress decides the deregulation of the banks and credit card industry has gone far enough, a position they currently appear unwilling to take, probably due to the generous contributions to their various political campaigns. Until new consumer protections are enacted, it is up to us, the consumers, to take charge of our finances, be knowledgeable about where our money is going, and to learn how to avoid banks that are charging excessive penalties and fees.