Overdraft bill must balance customer, bank needs
(Last updated: 10/26/09 7:44pm)It’s a situation that, unfortunately, far too many of us are familiar with. You’re busy living your life, getting to class, buying needed supplies and occasionally — or maybe more than occasionally — attempting to have some form of a social life. You hand over your debit card without really thinking about what you’re doing.
Then the day comes when you have to face the music.
Perhaps you head over to your bank’s Web site. Maybe you call up their automated telephone line. The result is the same: the realization you didn’t have quite enough money to cover all those good times. Even worse, you’ve now been hit with multiple overdraft fees as a reminder of your financial irresponsibility.
Of course, all of this is even worse when you’ve only overdrawn a measly couple of bucks.
The fees associated with the almost ubiquitous program known as “insufficient funds fee” have been the cause of ire for many students. And they should be — it’s estimated that this year banks will receive more than $1 billion in overdraft fees from young adults alone.
But thanks to a new bill being proposed by U.S. Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., banking customers might receive protection from outrageous overdraft fees.
Although some might be grateful to their bank for stepping in and allowing a purchase to go through despite insufficient funds, the choice ultimately should be left up to the individual customer. And this is what Dodd’s bill would do, by having all customers consent before being allowed to draw more than they have in the bank.
It doesn’t help that many banks charge a flat fee for overdrafts. If a bank charges, say, a $40 insufficient funds penalty fee, that fee would be the same whether someone overdrew while buying a $300 TV or a $3 cup of coffee. Although the banks technically can charge whatever they please so long as their customers know about it, this flat rate doesn’t seem right. If anything, penalty fees need to be proportional to how much money was overdrawn.
Another portion of the bill seeks to limit these penalty fees to only once per month and six per year, as opposed to a charge for every overdrawn purchase.
Although this might seem like a good idea in theory, probably it would not work out well. Because banks make a great deal of money off of their overdraft fees, they are more likely to hike up the charges if they only are permitted to charge their customers once a month.
It’s also unlikely most banks will happily go along with this proposed legislation. More than 100 banks failed in the past year, and any profit-making business is not going to sit idly by while the government chips away at one of their biggest sources of profit.
But in the end, the fault for overdrawing ultimately lies with us, the customer. Simply checking up on one’s balance at the end of every day, or week, isn’t that hard to do. Those who still balance a checkbook the old-fashioned way are likely becoming more and more of a minority. And it’s a shame.
Just a little bit more effort in the area of financial responsibility could go a long way if it prevents an exorbitant overdraft fee.
When banks make their profits from their customers’ financial irresponsibility, it potentially can give banks incentive to encourage it more. Although any form of legislation that keeps our banks accountable would be welcome, we ultimately must remain financially and fiscally responsible.
Originally Published: 10/26/09 7:44pm
Juan
10/26/09 10:40pmThis is silly – don’t spend money you don’t have, and you won’t have any overdraft fees. If you want to spend money you don’t have or if you don’t want to worry about these overdraft fees, a CREDIT card is the correct tool. If you want to spend money you do have, a DEBIT card will work. But understand the difference.
no one's perfect
10/27/09 12:12amIt’s not about purposely spending more than you have. Its that sometimes you think I check you wrote has already been cashed, but hasn’t and you think you have more money than you do. Pretty soon you made 6 debit card purchase and have $300 in fees.
Yes, you should keep track better, but if you are a busy student sometimes it is hard enough to just remember when you have a test.
Todd
10/27/09 9:09amWhere does the money come from when irresponsible bank account holders are allowed to make a transaction despite having insufficient funds? Fellow bank customers who are responsible enough to maintain a proper balance.
Where does Congress get money to give to people who have not earned it (i.e. personal and corporate welfare, stimulus spending, bailouts, cash for clunkers, et al)? Fellow citizens who are responsible enough to be productive and pay taxes.
THAT should have been the focus of the editorial.
Jason
10/27/09 9:42amI think most of us can agree that it is fine to punish people for poor financial planning. However, the fees are grossly disproportionate to the damage to the bank. These banks are basically writing in unreasonable punitive damage clauses into contracts you sign when you open a bank account. If these fees were in other contracts, they would be thrown out by courts.
Banks are increasingly turning to fees as a source of income along with increasing interest rates with little or no notice.
Zeke
10/27/09 9:50amWAHHHHH! I spent more money than I had and the meanies at the bank punished me for it. WAHHHHH! Mommy government, help me!
More pathetic help for people too concerned with their own existence to take any responsibility for their actions. In a 6-year colelge career, including a masters in engineering, I never overdrafted ONCE. Of course, I know how to balance a checkbook and I paid attention to my expenses, but those are skills that students today appear to be lacking.
Our government is absolving the consumer of any responsibility by soaking up bad mortgages, allowing them to dump their credit card debt, and falsely pumping taxpayer money into a “stimulus” that so far has only benefitted John Carlo and Generous Motors.
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You get what you deserve
10/27/09 12:59pmGranted, many banks overdraft fee tactics are nazi-like, but honestly, kids nowadays spend WAY more money than they should be.
You DON’T need those designer clothes.
You DON’T need cable TV.
You DON’T NEED A CAR.
You DON’T need expensive food, if you are a student you should be eating ()&^(ing oatmeal.
You SHOULDN’T BE DRINKING MORE THAN A COUPLE DRINKS A WEEK.
You get what you deserve.
Jason
10/27/09 1:53pmZeke-
The bill doesn’t take away the right to punish people for overdrafts, it simply asks the punishment to fit the crime.
There is no way a bank suffers a $300 loss when someone overdrafts by $3.
Seems like a lawyer should form a class action suit to challenge the validity of these contracts.
Zeke
10/27/09 2:40pmJason,
You own statements prove why increased fees are necessary. People obviously haven’t learned not to overdraw from their accounts, so banks are ratcheting up the penalty for doing it. Maybe when an overdraft fee hits $50, people will finally stop using the bank’s money to pay for their recklessness. It’s a punitive damage, something very common in legal cases to prevent similar problems in the future.
The “contract” you refer to is agreed to by the customer at the start of the account.
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Jason
10/27/09 2:54pmZeke-
Please point out to me how my post illustrates why disproportionate fees are necessary. Is there any study or proof of any kind that shows higher fees lead to fewer overdrafts?
I’m aware that the contract is agreed to, but that does not mean there is no recourse to unreasonable terms. Simply because you sign a contract does not mean all the provisions of the contract, or the contract itself, is enforceable.
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Zeke
10/27/09 3:18pm“Please point out to me how my post illustrates why disproportionate fees are necessary.”
Simple. You claim that banks paying for overdrafts is no big deal. The legislation being proposed, which you appear to support, limits the banks to assessing an overdraft fee to SIX PER YEAR. So if Joe consumer takes a little loan from the bank 20 times a year to pay his overdrafted charges, the bank is just supposed to suck it up?
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Todd
10/27/09 3:20pmLower penalties and/or limiting the number of times in a year a bank can enforce penalties will NOT reduce the instances, but in fact will most likely significantly increase the problem, meaning the bank and those customers who are responsible enough to maintain sufficient funds are the ones who suffer. As Zeke points out, the penalty is meant to deter the problem. It’s not as if these occurrences don’t cost the bank money in personnel time that could and should be used for other purposes.
This is typical of how Congress thinks – ignore the real problem, pretend to help “the little guy,” enable irresponsible behavior, use other people’s money to pay for it all.
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No Todd
10/28/09 8:49am“Where does the money come from when irresponsible bank account holders are allowed to make a transaction despite having insufficient funds?”
Great point, Todd. But this line of thinking does more to validate the anti-fee argument than to support fees. The point is banks “allow” customers to make multiple purchases when over their balance which then result in multiple fees.
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Zeke
10/28/09 9:01am“There is absolutely no reason that consumers shouldnât be notified that there account is insufficient to cover the transaction and be given the choice when making a purchase”
Really? Tell me, how would you implement such an “unreasonable” system? The debit card is swiped and the merchant issues the charge to VISA or Mastercard, which does not have the capability to verify a customer’s account balance before it posts the charge to the bank.
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Todd
10/28/09 9:05amNo,
It’s not unreasonable to expect adults to keep track of their own finances, either. It would most likely be cost prohibitive for banks to be able to notify every debit card holder at every POT that they have insufficient funds to cover a transaction.
Jason
10/28/09 9:17amZeke-
Show me where I said it isn’t a big deal to overdraft.
I did not say I support the proposed legislation in its entirety. I can see where you would make that assumption though. I would agree that limiting the fees to 6 times a year is a bad idea.
Dodd isn’t arguing about fees for checks, balance transfers etc because they aren’t disproportionate.
Regardless of Dodd’s feelings on the issue I am fine with penalizing these people, but the fines should be proportionate to the damage to the bank and banks should stop practices that allow them to ratchet up the fees:
link
No Todd
10/28/09 12:10pm“It would most likely be cost prohibitive for banks to be able to notify every debit card holder at every POT that they have insufficient funds to cover a transaction.”
Cost prohibitive? Really?
In this day and age? Do you REALLY believe that? I guess I can see where your coming from. It isn’t like the banking system just received trillions of my tax dollars to cover “their” mistakes. How dare we consumers ask for reciprocity?!
It is predatory lending dressed up to look like a consumer service.
Todd
10/28/09 1:29pmPredatory lending? This doesn’t fall under any definition of lending I’ve ever heard of.
Jason
10/28/09 1:58pmTodd-
If you think it about it, it is pretty much predatory lending. The bank essentially loans you the money that you put on the ATM card that is in excess of your account. In exchange they charge you $30 a day and whatever other fees that come along.
It’s obviously not a traditional definition of a loan, but to a large extent it is just that.
No Todd
10/28/09 2:55pm“Predatory lending? This doesn’t fall under any definition of lending I’ve ever heard of.”
What would you call it then? The bank provides THEIR money to a merchant on YOUR behalf. If it looks like a duck and it quacks like a duck…
Todd
10/29/09 8:49amNo,
I’d call it irresponsible money management on the part of the account holder.
Zeke
10/29/09 2:24pm“What would you call it then? The bank provides THEIR money to a merchant on YOUR behalf.”
I’d call it a valuable service provided by the bank for a fee. Keep in mind that they do not have to provide overdraft protection at all.
Perhaps what the bank needs to do is end any kind of overdraft protection and let VISA and Mastercard go after people. I’m sure that people would quickly beg banks to put it back in place and pay whatever they wanted after a few calls from VISA and a ruined credit score.