Intelligent isn’t a word I like to throw out all that often. It infers that a person is rational and consistently makes smart decisions. Idiot, on the other hand, I use daily. Whether it’s me or someone else, it doesn’t take much to fit that bill. So back in high school when my friend Carlton told me he amassed $1,000 worth of overdraft fees during one summer, the first words out of my mouth were, “You’re an idiot.”
Unfortunately, the age of debit cards has made the ability to balance a checkbook obsolete.
It’s easy to put the blame on the customer in Carlton’s situation, but the matter isn’t so black and white when a customer is in an economic bind and has to live from paycheck to paycheck. The industry argues that it’s the responsibility of the account holder to know how much he has available. Agreed. Don’t spend $20 if when you only have $10. On the other hand, banks have an ethical responsibility not to engage in practices that intentionally make customers prone to overdrafts, like Chase has been doing for years.
ATM and debit transactions for Chase accounts are grouped together at the end of the day then subsequently charged from highest debit first to the lowest. This increases the probability of an overdraft for account holders that expect transactions to be processed chronologically. Suddenly, a $6 miscalculation winds up costing $41 when the $35 penalty is added. Couple this with the fact that some institutions like Bank of America let customers rack up to 10 overdrafts a day and a consumer could be looking at $350 worth of fines. Nor does it help that these fees increased 4 percent over last year and are up from just $10 a decade ago. That’s just ripping customers off.
There’s no doubt that penalties can add up quickly, but just how often do customers overdraw? In a survey by the American Bankers Association, a reported 82 percent of the 1,000 Americans polled didn’t pay overdrafts in the past 12 months, and of those that did pay them, 96 percent were glad the bank processed their transaction anyway to avoid embarrassment.
On the surface, that looks pretty good, but the survey failed to mention the $38.5 billion the bank earned on those fees charged to 17 percent of their account holders. The fact remains banks have made a substantial amount of their profits at the expense of their poorest customer segment, which is certainly at odds with the fact that 85 percent of the nation’s wealth is held by the top 20 percent.
There are alternative ways for banks to handle overdraft fees. The most logical approach would have to be applying a fee proportional to the amount withdrawn. Banks could easily dip into a savings account when a customer’s checking account dries up or offer credit cards with a $300 limit instead, as some banks currently do. Banks for the most part, however, are steadfastly charging overdrafts and not allowing customers to opt out of the program because of the income they bring in from the associated fees.
Congress has heard the complaints. Sen. Christopher Dodd (D-Conn.), the senate banking committee chairman, wants to introduce a bill requiring banks to ask permission to overdraft their accounts, rather than automatically billing them. Transactions instead would just be rejected if an overdraft was to occur.
Certainly banks are struggling right now with the economic landscape, but, as Dodd commented, “People out there are getting whacked. They should have the right to say, ‘Deny me the transaction.’”
Thankfully, government action won’t be necessary.
Banks have responded to the criticism nobly. Rather than sending some fat-cat lobbyist down to Washington, Bank of America has changed their overdraft policies to go in effect by Oct. 17 by giving customers the option to deny transactions when their accounts hit zero and plans to further limit the amount of times customers can overdraft their accounts to fight against rolling fees. Overdrafts fees less than $10 have been dropped all together. Chase plans on billing customers chronologically rather than grouping transactions from highest to lowest to protect account holders.
Hopefully now banks can get back to their old way of making money, or, as This American Life put it, the 3-6-3. Save money at 3 percent. Loan at 6 percent. Be on the golf course by 3 p.m.
Robert Fragoza is a junior majoring in chemical engineering. His column, “Reality Check,” runs Fridays.