I have probably spent $500 in my life on overdraft fees.
Call me financially irresponsible. Call me poor. Call me extravagant. I have heard it all from my parents.
I hate overdraft fees immensely. The concept itself demonstrates the faulty business model upon which the banking industry has thrived for several decades.
A long time ago, in a white-collar criminal’s mind far away, high-ranking bank officials developed a method to protect their customers from public humiliation. If a consumer in a grocery store writes a check for a week of groceries for his family, the money from the account is withdrawn at a time of the merchant’s discretion.
If the money is not available in the checking account, then the bank will cover the charge for a small fee that was originally $25. Today, at my bank (Wachovia, if you are wondering), the charges are $22 for your first overdraft, and $35 for all subsequent offenses.
The bank heads rationalized this fee by assuming that the consumer’s paycheck has yet to post to their account, so a small fee incurred would have no effect on the financial health of the consumer.
Unfortunately, this “Overdraft Protection Program” is a common “feature” of most free checking accounts, and with the prevalence of the debit card, it has provided a new and powerful revenue stream banks cannot live without.
This overdraft fee system is under scrutiny in the major bank reforms in the United States. According to a Los Angeles Times article from November 2009, the banking industry has brought in $21.5 billion through overdraft and similar fees from the first sixmonths of last year, which is more than the total amount from 1999.
Should you be worried? Probably not.
The legislation zeroing in on overdraft fees calls for a cessation of these charges, effective July 1.
Many bank officials find this legislation a serious threat to the ability to maintain operation. The Wall Street Journal has reported that Bank of America is looking at losing somewhere between $150 and $200 million without these
fees.
Come July 1, this revenue will not be available to the banks. How are they going to make up this money? Cutbacks? Ha, yeah, right.
I am neither a student of business, economics, nor anything like that. I’m an English major, but I can tell you that if a company is not able to make money on an imaginary product that was sustaining them the way overdraft protection was, then beware of rising interest rates and other fees to take its place.
Whatever happened to the traditional bank practices? As I recall, a bank is set up to provide loans from the Federal Reserve to members of the community. It makes its business on the interest charged on the loans made to the borrowers.
A bank is supposed to be a place where you can deposit your money and have it resting there safely. Do you remember the days when free checking accounts you signed up for paid you yearly interest? No? That’s because we were just children in those days.
With the countless instances of negative press the banking industry has had over the past year, it is remarkable to learn that banks such as Bank of America will be experimenting with other methods of income, such as tacking on annual fees to credit cards and free checking accounts.
It will be the end of free checking.
According to AmericanBanker.com, the poorest 16 percent of the American bank consumers pay for nearly 90 percent of these overdraft fees. It is sort of difficult for the lower class to pull itself up when they cannot afford to pay rent, bills or groceries.
Honestly, I would be so crazy as to advocate not giving a bank your business until the bank reforms are in place in July. I cannot trust them to leave my credit card’s interest rate alone — what if they decide to retroactively raise my interest rate? They say in the fine print of my welcome packet that the terms of the contract are “subject to change.”
It wouldn’t be the strangest thing to happen. My mother’s credit card through Discover saw such a retroactive rise in interest rate.
Like the terms of her credit card, my business with the defunct banking industry is most likely subject to change.