Today’s Financial Times highlights a possible target of regulatory action: bank overdraft fees. And those fees are not distributed the proverbial 80/20 pattern, with 20% of the accounts contributing 80% of the activity, but 90/10. And that 10%, not surprisingly, is in consumers with the lowest credit scores.
And the biggest banks are the ones with the most aggressive fees.
What is disappointing is that this FT article failed to indicate what costs the banks incur in processing overdrafts. Although this activity is presumably very profitable, it would be nice to know by how much.
From the Financial Times:
US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s…The fees are nearly double those reported in 2000…
The Federal Reserve is working on rules on overdraft fees, and rules on customer charges could be a priority of the Obama administration’s proposed Consumer Protection Agency if approved by Congress.
Data from Moebs Services, a research company, show that the crisis has prompted many banks to lift charges on overdrafts and credit cards in order to boost profits.
The median bank overdraft fee has this year rose from $25 to $26, according to Moebs, the first time it has gone up in a recession for more than 40 years…..
Overdraft fees accounted for more than three-quarters of service fees charged on customer deposits…
The most cash-strapped customers are the hardest hit by such fees, with 90 per cent of overdraft revenues coming from 10 per cent of the 130m checking accounts in the US….
Banks say that the fees compensate for the risk they incur when they pay on behalf of customers who do not have enough money in their accounts….
The highest overdraft fees were charged by the largest banks, said Mr Moebs. At banks with assets greater than $50bn – a group including Citigroup, Bank of America, JPMorgan Chase and Wells Fargo – the median overdraft fee is set at $33.
At BofA, a customer overdrawn by as little as $6 could trigger a $35 penalty. If the customer does not realise they have a negative balance and continue spending, they could incur that fee as many as 10 times in a single day, for a total of $350. Failing to repay the overdraft within a few days results in an additional $35 penalty….
Chase has tiered overdraft fees – the first overdraft within a 12-month period is charged at $25, the second to fourth at $32 and the fifth at $35….
Consumer advocacy groups point to very low loss rates on overdrafts for all banks and argue that overdrafts are the least risky form of credit, while being the most expensive for consumers.
Eric Halperin, director of the Center for Responsible Lending said: “The banks own your pay check before you do, so the only way you can default on your overdraft is if you choose to open another account and deposit your income elsewhere.”