Overdraft Hell Revisited
| Wed Sep. 9, 2009 9:25 AM PDT
Felix Salmon is every bit the hater of outrageous bank fees that I am, but he goes beyond the hate and responds to today's NYT front pager with some practical ideas for reform. Here's the Salmon Plan:
• Banks are allowed to offer automatic overdraft protection, but only if it’s free. (They can charge an annualized interest rate on the overdraft, but no set fees.)
• If a bank wants to charge fees as well as an interest rate for overdraft protection, then that protection has to be opt-in rather than opt-out, and the fees should be prominently disclosed at the opt-in stage.
• Fees should be be capped at $20, with a limit of one such fee per day.
I'm not sure I'd agree to even that much, frankly. For my money, overdraft fees should be regulated as short-term loans with agreed-on interest rates, and banks should simply decide for themselves how to cap them. If they don't trust you, the cap is zero and you can't overdraw your account at all. If they trust you a lot, the cap is high and you can overdraw your debit card all you want while your bank rakes in the interest payments. And yes, of course overdraft protection should be opt-in. It's a sign of how fatally corrupt the finance industry is that either one of us even has to say that.
Would this make banks less profitable? Of course not. They'd make up for the overdraft revenue somewhere else, which is exactly what I want them to do. I want banks to compete openly, with simple annual fees, clear interest rates, and services with plainly advertised up-front costs. If debit cards cost the bank money, they should charge annual fees to everyone who uses them, rather than subsidizing 90% of their business with hidden fees on the 10% who are least able to afford it in the first place. It's a disgrace that we've allowed this to go on as long as we have.
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Comments
Overdraft without fee and reasonable interest rate
Submitted by karog on Wed Sep. 9, 2009 10:26 AM PDT.
I have no affiliation with ING other than that I have an Orange Electric account there.
The account has an optional overdraft line of credit which I beleive you have to be approved for. I don't think it can be all that large but not sure about that. I have opted out of that so far but you set it up as part of your account initiation.
The reason I post is that there is no fee for using the line of credit (ie when there are insufficient funds in your account) and the interest rate is variable but currently 7.25% which is a hell of a lot better than credit card interest rates.
So it can be done. We have an existence proof.
Banking in the UK
Submitted by Trippp on Wed Sep. 9, 2009 9:49 AM PDT.
I dunno if it is still this way, but I was surprised to find out a couple things when I lived and banked in the UK.
First, there was no interest earned on a regular savings or checking account.
Second, I'm not exactly sure if the overdraft fees were in place, and what they were, since all my banking was debit card with instant feedback and no overdrafts allowed.
So at least to my layman consumer view it looked like the UK banks did, as you say, get their profits some other way and not from gouging the poorest.
Also, from my layman consumer perspective, I'm pretty sure there were banks in the UK and that they had been able to operate successfully for awhile at least.
So it can be done. Unless The Lounsbury corrects me, of course.
Also, please see my blog linked from my signature. Thanks.
TrippTripp
Retail UK
Submitted by The Lounsbury (not verified) on Wed Sep. 9, 2009 2:34 PM PDT.
I have been in special accounts off shore for a while, I can't speak to present retail practice. Certainly there were overdraft fees.
In general it is hard to make simple cross-national comparisons on back costs, given some items are cheaper, but others are not. However, I do recall seeing something that was rigorous some time back. I shall have to find it.
Regardless, I fine Drum's commentary ill-posed, for all that it does seem to me a subset of banks in the US are engaged in what I find to be poor behaviour that needs to be regulated so that at least it is transparent, per my comments in the other post.
but, but...
Submitted by nerd on Wed Sep. 9, 2009 11:13 AM PDT.
Sarcasm mode on:
If the banks did what you said the profits would be so... small! We can't allow that. The CEO and other C level people must have big paychecks, otherwise we won't be able to hire Smart People (tm) for those jobs. You wouldn't want that, now would you? Profits must be huge, I mean HUGE! Just like health insurance companies who are able to collect your payments for years then cut you off if you incur too much expense. The banks need to be able to hire people at least as smart as insurance companies do. You just don't understand capitalism, do you?
And tell me again...
Submitted by rosswords (not verified) on Wed Sep. 9, 2009 12:29 PM PDT.
...why we don't need a Financial Consumer Protection Agency?
WTF?
Submitted by Anonymous (not verified) on Wed Sep. 9, 2009 12:48 PM PDT.
KD wrote: It's a disgrace that we've allowed this to go on as long as we have.
WE, white man?
Couldn't this sentence be written about many things (Iraq war, DADT, etc)?
And wouldn't it STILL be silly?
Americans might as well
Submitted by tpx on Wed Sep. 9, 2009 12:55 PM PDT.
Americans might as well become familiar with disgrace.
One often overlooked aspect
Submitted by James Harrington Livy (not verified) on Wed Sep. 9, 2009 1:42 PM PDT.
One often overlooked aspect of this story is the fact that many of these banks changed their policies with respect to how they assessed overdraft fees and the daily organization of transactions under the guise of incredibly confusing legalese at just the time they needed to raise funds to pay back TARP funds. As a result of the confusing switchover, many customers were hit with fees at just the right moment, providing an extra influx of capital that banks used to pay back TARP funds. If you follow the logic of this scheme, what emerges is that the banks raised funds to repay TARP from their most financially vulnerable customers, a segment of the populace least likely to have any stake and/or bear any blame for the financial crisis - not many bankers or overextended homeowners I'm guessing were among them. Essentially, the banks used abusive overdraft fees garnered from taxpayers to very cleanly repay the loans that these same taxpayers provided them with. As a result, the bank executives most responsible were able to slip through the crisis they caused without any penalty.
Just so fairy tale.
Submitted by The Lounsbury (not verified) on Wed Sep. 9, 2009 2:40 PM PDT.
Your wierd idea that overdraft fees paid back funds.
A Bank Analyst's View; Overdrafts Vs Payday Loans
Submitted by Sean Ryan (not verified) on Wed Sep. 9, 2009 1:54 PM PDT.
The interesting thing to me is that payday lenders are routinely vilified while bankers are often regarded as pillars of the community, despite the fact that standard bank overdraft practices are far less consumer-friendly than payday loans. The debate over payday lending is relevant because bank overdraft charges effectively form the umbrella under which payday lenders can function. Far more than banks care to admit, overdrafts and payday loans are substitute products. In fact, the biggest difference is that payday lenders offer consumers a better deal than banks do. The typical payday loan costs a fee equal to 15% of the amount borrowed for a two-week loan, which equates to an APR of 391%. Borrowers must actively seek out payday loans, and the terms and conditions are all laid out immediately prior to the transaction. In contrast, the effective APR on a typical overdraft transaction can exceed 1000% (it varies by type of transaction – check/ATM/debit) and disclosure, while excellent at some institutions, is broadly far inferior to that of the payday loan industry.
I disagree with my Representative, Carolyn Maloney, on A LOT, but I think her overdraft bill strikes a very good balance between protecting vulnerable and often unsophisticated customers without unduly interfering with the free market.
The real question...
Submitted by WoofWoof on Wed Sep. 9, 2009 2:04 PM PDT.
This whole thing developed in the last few years because government oversight was non-existent. There's no point in blaming greedy bankers for gouging the poor, it's in their nature and they'll continue to do it until laws are passed.
And it's easy to blame this on Bush & Co. But here's the real question: are we going to continue to see the rise of things like this in the next few years, or can we count on the Democrats to regulate this stuff as it arises? And I want to trust my party, but right now they seem to intertwined with wall street interests I'm really not sure.
Your party is cloth coat
Submitted by tpx on Wed Sep. 9, 2009 2:41 PM PDT.
Your party is cloth coat Republican.
In a lot of ways, it really is, at least with a certain rose-colored glasses view of the cloth coat Republicans: pro-civil-rights, pro-entrepeneur rather than pro-big business, regulated industry rather than state control or pure laissez-faire, and generally northern rather than southern.
However, that party hasn't existed in my lifetime, and so I've always voted and supported Democrats. In fact, I'd argue that party never really did exist, it was always a myth. Republican attacks from the 30s seem to be out of the same playbook they're using today.
The real answer
Submitted by Trippp on Thu Sep. 10, 2009 8:18 AM PDT.
WoofWoof,
Can you trust the Democrats to regulate corporations?
No. The ultra-rich and the corporations they hide behind, our current "nobility" have the real power, and they have that power over both political parties. I am not saying both parties are identical. Obviously not.
For those of us without the power, we peasants and not Lords, what can we do? We can speak up, speaking truth to power. We can continue to try to be clever and pit one Lord against another - trial lawyers vs pharma, etc. After NAFTA we have a little bit of freedom of movement - we can move to Canada and continue to work in the US.
Unfortunately the current social system is so strong and so global that what we peasants do will not change it very much.
So what will change the current system? External reality will change it, because that is the one thing the Lords cannot control.
Clearly one big change that is coming is the depletion of cheap and accessible energy resources. I doubt any sensible person will dispute that. Personally I think this is the biggest foreseeable, unstoppable change that is coming.
Other than that it is all speculation. There are books written about what the world would be like if, for example, Mr. Fusion became available. If cheap, reliable, sustainable, and clean energy became available to all. Right now that looks like a pipe-dream, but I suppose it could happen.
Fleecing the poor is always the easiest
Submitted by Trippp on Wed Sep. 9, 2009 5:09 PM PDT.
I got in big trouble once using the big brush of 'Christian' while I meant the smaller brush of 'authoritarian follower.'
In the same way I think it is important to not lump all 'bankers' into one big smarmy pile. Many times the small town bankers, sadly a dying breed, really are the pillars of small communities. For all I know there might even be an honest, moral CEO left at some Wall Street investment banks, too, but in general corporations seem to be more prone to corruption and immoral activities than their smaller cousins. They can do a whole lot more damage, too.
smaller banks do better
Submitted by Michael L (not verified) on Thu Sep. 10, 2009 6:22 AM PDT.
My savings bank in Mass. approved me for overdraft and charges no fees. It's got maybe a dozen branches. It can't do all the stuff the big guys do, but for personal checking it's great. And they offer free on-line access with bill paying abilitites.
The big guys continue to gouge their customers at every turn. And it's *always* the small customers who get gouged the worst.
I know this falls on deaf ears...
Submitted by Roark (not verified) on Thu Sep. 10, 2009 5:31 PM PDT.
Newsflash: overdraft fees are NOT preadatory. If you're smacked with an overdraft fee (deep breath here): you're an idiot. Plain and simple, you spent more money than you had in your account. Okay, argue on specifics: 'The bank didn't make my money available!' 'I though that check was good!' 'The mean old bank moved my purchases around in a different order so I got more fees!' 'I forgot I made that purchase!' Wah wah. I'm nonplussed. All arguments for that are squashed when you realize that the cost of fees, how purchases are processed, EVERYTHING is in the agreement we all sign when we choose a bank and open an account. Don't like the disclosures? Don't bank there. But don't start yet another government program for people who can't pass 2nd grade (I'm being generous here) math.
My favorite? 'But the purchase was only a dollar and I got a fee of $30!' I hope the Slurpee was tasty.
Ahhhh, I miss the days of being a customer service rep for a bank.
Payday lenders get a bad rap. You'd think these people are building mansions while the poor suffer – but if you go by the numbers, that attitude is about 30 yards downfield from the truth. In reality, payday lenders, as an industry, yield meager returns between 10 to 25%, if you go by SEC filings. A recent study by Oxford and Vanderbilt University scholars, found that lenders make modest profits and high costs, and that the profitability of the industry is far below the banking and credit card industry. It would seem that payday lenders and payday loans aren't as bad as the huge banks we just gave trillions to, and it isn't as if payday lenders buy Congressmen, is it?
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