If you go to Google, and punch in "overdraft fees," you'll see no shortage of news stories about people who lost track of their account balances, paid for some small item (the proverbial $5 latte), and found they overdrew their account. Overdraft protection is something banks have usually put in place for their customers automatically. In recent weeks, the FDIC and some in Congress have talked about reining in this practice. The banks, no dummies, are responding with their own voluntary changes.
One aspect of this story I didn't have time to go into on tonight's program is that overdraft fees -- however much maligned -- are something some consumers really want. Economist Mike Moebs, of Chicago-based Moebs Services, told me the biggest users of overdraft protection programs are typically people with low credit scores. It makes sense. These programs are a form of very, very expensive short-term credit. And with all the furor over high bank overdraft charges, some banks will probably emerge as "winners" in this controversy - the banks with lower overdraft protection fees.
It turns out the $35 mentioned in the media, is the median overdraft charge for a large national bank. Community banks and credit unions typically have lower overdraft fees -- in the mid-$20 range. Moebs told me there is "price elasticity" in overdraft protection programs. In other words, raise the price too high, and consumers will look elsewhere. That's what Moebs believes will happen with overdraft protection. Consumers of bank services won't hesitate to take their accounts to local banks where overdraft protection fees aren't so high. He says some banks recognize this as an opportunity to attract new deposits and are actually lowering their overdraft fees to bring in more customers.
Whether that's "good" or not depends on your perspective. Should consumers be protected from "usurious" overdraft fees (as FDIC chief Sheila Bair said in a speech in September)? Or will the "marketplace" correct the situation when those who tend to overdraw their accounts decide to do go someplace with lower fees?
Comments
BANKS ARE MESSING UP PERSONAL AND BUSINESS ACCOUNTS, IT HAPPENED TO ME, THE ONLINE FORMAT LOOKS TOTALLY DIFFERS ON A DAILY BASIS, AND AS PROOF I HAVE PRINT OUTS FROM THOSE DAYS DISPLAYING A POSITIVE BALANCE, AND SUDDENDLY THE NCEXT DAY AN UNPOSTED ITEM POSTED BRINGING THE ACCOUNT OVERDRAWN , EVEN THOUGH THAT PURCHASE DONE 3 DAYS AGO ALREADY WAS TAKEN OUT OF THE AVAILABILITY OF FUNDS. THE BANK OF AMERICA IS THE WORST BANK TO BANK WITH, I'VE BEEN THEIR CUSTOMERS FOR 11 YRS. AND NOW I AM CLOSING ALL MY PERSONAL AND BUSINESS ACCOUNTS.
The people with poor credit who bounce checks and overdraft accounts repeatedly may not be able to take their business elsewhere, because they are placed on a list (ChexSystems) that disqualifies them from opening new checking accounts at most banks, although the reporting bank may offer to continue serving them.