Bailout

The perfect overdraft

By Felix Salmon

What to make of BofA’s decision to abolish overdraft fees on debit-card purchases? Josh Duboff says it’s “kind of undeniably great”, James Kwak says it’s a good thing, and the Center for Responsible Lending says that it’s a GOOD thing. Only Kevin Drum spies a fly in the ointment:

It just doesn’t make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn’t smell right here.

Kevin’s hit on something important here: while this is undoubtedly an improvement on the status quo ante, it’s far from optimal.

What I’d love to see, maybe from BankSimple, when it finally launches, is a UK-style overdraft. This has two main features which one almost never sees in the US:

1. It has no fees attached; you just pay interest, per day, on the amount that you’re overdrawn.
2. It’s a negative balance on your checking account, rather than a separate loan facility: as a result, if you’re overdrawn and you deposit more than that amount into your account, the overdraft automatically disappears.

If this works in the UK (which also, incidentally, has much more consumer-friendly ATM fees than the US has), I can’t see why it couldn’t work in the US. But BofA chose a very different route. Why? I suspect because they want to keep the fee income from ATM withdrawals and checks, when insufficient funds are available. If you get rid of overdraft fees on debit card purchases, it’s much easier to keep them on everything else.

Full post as published by Macroprudential on March 10, 2010 (boomark / email).