Consumer Law

Overdrafts Generate Big Bucks For Banks

By Randall Ryder

An estimated 45% of the country’s banks make more from overdraft fees than they do from credit card fees(!). They will generate $27 billion in covering overdrafts on checking accounts this year. Proposed legislation, however, may at least put in dent in that healthy source of bank revenue.

A 2008 FDIC study estimates that 41% of banks have automated overdraft programs, and a robust 77% of large banks have such programs. The FDIC also estimates that 93% of overdraft charges come from 14% of bank customers.

Some banks have also come under fire for manipulating the chronological order of withdrawals to ensure there are multiple penalties. For example, a customer has $10 in their account, and makes purchases of $3, $4, and $26. If the bank processes the purchases in true chronological order, there should only be an overdraft fee for the final purchase. But if the $26 purchase is processed first, the customer gets tagged three times. It’s just plain shady.

Interested in keeping their cash cows, banks will fight tooth and nail against any proposed legislation. The Federal Reserve is considering requiring banks to get permission from customers before enrolling them in an overdraft program. My guess, however, is that this will do little to stop the chronic 13% of overdrafters from racking up these fees. In addition, the proposed legislation does little to fix the ridiculous inequity of getting charged a $26-$32 overdraft fee for overdrawing by 25 cents.

Overspending on Debit Cards is a Boon for Banks | NY Times

(photo: Great Beyond)

Full post as published by Caveat Emptor on October 07, 2009 (boomark / email).