Do you know that the biggest banks make huge profits by charging overdraft fees? Often, people in urgent need of money require an overdraft. Many of them take out payday loans to solve urgent crises. In recent times, the payday loan industry has faced criticism. However, banks keep encouraging people to go for an overdraft, which allows them to make good profits. For example, in 2023, the banks collected a staggering $5.83 billion through overdraft fees.
If you are already facing a financial crisis, then taking an overdraft will only push you deeper into trouble. The banks have been exploiting their customers for a long time. There is legislation to prevent this, but the banks have always found a way to manipulate the system.
The payday industry is often criticized. On the other hand, there is hardly any criticism of the banks.
The Credit Industry Has Changed
Borrowing money started to change since the end of World War Two. At LendUp.com, you will find some of the most lucrative lending options for customers in the 21st century.
Credit itself changed with the decline of open-book credit (shipping of goods with the receiver’s promise of paying) and pawning. This was replaced by credit cards, overdraft protection, and payday loans. However, not everyone can get overdraft protection. Only people with high incomes facing a short-term crunch could get an overdraft.
With time, however, more people became eligible to get overdrafts. Banks and credit unions started offering ODs in the middle of the 1990s. By 2003, about 1000 banks were letting their low-balance customers overdraw their accounts, often by skirting credit laws. By doing this, they were raking in billions of dollars as fees. In this way, the banks were encouraging their customers with limited funds, to spend beyond their means, so they could earn their fees.
To the banks, the overdraft fee was a stable income source compared to other products where the interest rate fluctuated. According to a report published by the FDIC in 2006, the overdraft fees were 6% of the net operating revenues on average.
In the first quarter of 2015, Bank of America, Wells Fargo, and JP Morgan Chase together collected $1.14 billion from overdraft fees and other related service charges.
Overdraft Fee Exploitations
There are many other problems with overdraft fees, which work much like credit cards and payday loans but are worse.
According to a Consumer Federation of America report, overdrawing the account was much like using a credit card, but with a major difference. With credit cards, the banks cannot take money from a customer’s bank account directly to repay the debt. However, those who overdraw their accounts using a debit card do not get this protection. The banks can “set off” when a customer overdraws with a debit card after the customer deposits money into his account. The bank can also draw out the overdraft fees.
According to the same report, often banks were letting people overdraw while paying checks, for ATM withdrawals, point of sale purchases, and pre-approved debits, though there weren’t adequate funds in the account.
Citizens Bank, for example, was promising “convenience and peace of mind” while offering overdrafts to their customers on their website. They said that customers will incur a fee between $25 and $33 for each transaction depending on how many days the account remained overdrawn. However, they did not inform that customers had the option of buying optional savings account overdraft transfer coverage for as little as $3 each month, and that, they could also apply for overdraft protection credit that costs just $20 every year.
Both these options were more affordable for their customers and less profitable for the bank.
Rules for overdraft fees were implemented in 2010. In July 2010, banks had to allow their debit card customers to enroll for overdraft fees instead of automatically charging anywhere between $20 and $30 when there were inadequate funds to cover a purchase.
How the Banks Kept Manipulating
However, the banks found a way through fee manipulation. In August 2010, A federal judge asked Wells Fargo to pay customers in California $203 million in restitution for claims that transactions were manipulated to maximize overdraft fees.
Bank of America had to pay $410 million the next year. Forbes reported that banks continued manipulating their fees in their 2012 Consumer Financial Protection Bureau (CFPB) report.
According to a report by The Center for Responsible Lending, the banks were charging an overdraft fee of $35 on average. Some even charged a “sustained overdraft fee” if the account stayed overdrawn for many days. Some banks were charging a one-time additional fee of $35, while others charged between $6 and $8 every day until the account balance returned positive.
Who Suffered the Most?
8% of customers incurred close to 75% of all overdraft fees. But this worsened, as the FDIC discovered that 9% of all checking account customers were paying 84% of the overdraft fees. The poor were the most to suffer as overdraft fees were disproportionately affecting low-income and young customers. This finding was validated in a CFPB report later.
The Poor Are Paying for the Rich
With overdraft fees, the poor end up subsiding the rich. The Economist reported in an article that those earning $30,000 or less were twice as likely to take an overdraft and many of them were unable to repay. This is worse than a payday loan and certainly an employee loan.
The banks would naturally close their indebted accounts. It would almost be impossible for these people to open an account with another bank. So they get shut off from the formal banking system and often turn to schemes where the charges are sky-high.
