Technology’s Saving Us All From Overdraft Fees

by Jason Unger

I’ve always been incredibly morally opposed to overdraft fees.

Not morally, like fire and brimstone, but more philosophically. Like, it’s pretty simple: if you don’t have money in your account, you shouldn’t be able to take money out.

Isn’t that the whole point of banking? You put in money, you take money out. You can’t take out what you don’t have.

But, somewhere along the way, banks figured out that not only can they let you take out money you don’t have, but they can also charge you a fee for doing it (in addition to any interest you’d owe on the withdrawal).

The FDIC has studied this, and they agree it’s absolutely a horrible thing for consumers. Consider these facts:

Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth, 24.6 percent, of the surveyed banks also assessed fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.

The (surveyed) banks earned an estimated $1.97 billion in NSF-related fees in 2006, representing 74 percent of the $2.66 billion in service charges on deposit accounts reported by these banks. Banks operating automated overdraft programs earned $1.77 billion in NSF fees in 2006, accounting for 90 percent of total NSF-related fee income earned by the entire study population.

Consumer complaints about automated overdraft programs were received by 12.5 percent of the banks that operated these programs, compared with consumer complaints from less than 1 percent of banks offering linked-account programs and 1.5 percent of banks offering line-of-credit programs.

Banks that care about their customers shouldn’t be doing these things — which is why so many people hate their banks (and I love credit unions).

But, thankfully, technology — as it does in so many other sectors — changes everything, and makes life better for consumers. According to a recent article in The Wall Street Journal, banking apps and online banking are making it less likely consumers will get hit with overdraft fees.

Because people can now find out their bank balances with a few taps on their phones—just about anywhere, anytime—they overdraw their accounts less frequently, reducing what had been a lucrative source of fees for the banks. Consumer can also have their banks automatically send alerts to their phones when balances drop below certain levels, also preventing overdrafts.

“The whole consumer psyche is changing and their behavior is changing,” said Richard Hunt, president of the Consumer Bankers Association, a trade group. “Consumers are smarter because of the technology.”

The WSJ also recently reported that bank fees overall have declined, dropping nearly 21% to $32.5 billion in 2013 from $41.1 billion in 2009, when they were at their highest. More than half of those fees are from overdrafts and bounced checks.

This is good, good news. These fees are horrible – everyone knows it – and having the ability to avoid them is a great win for consumers.

Thanks, technology.

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