It’s an astounding number that puts a big financial burden on the people who can least afford it.
Smaller banks can make much more than the overall median of 8% non-interest revenue. Woodforest National Bank, which had over 750 branches in 17 states, and First National, which operated just under 300 locations, made more than 40% of their of non-interest revenue from overdraft charges at the time of the study, according to SNL Financial.
“These banks are highly reliant on these charges,” says Tyler Hall, a senior bank analyst at SNL Financial. “It just points out that’s their business model.”
How does this happen? For consumers with low balances, an unexpected overdraft fee dig a hole that’s hard to get out of. Frequently marketed as a ‘customer service’, overdraft fees are incurred when a bank account lacks sufficient funds to cover a transaction and the institution pays the transaction anyway. The institution then repays itself the value of the overdraft transactions, and all accompanying fees, from the account holder’s next incoming deposit.
Debit card payments and paper check payments alike can result in overage fees, which average $35, but that may only be the start of the problem. “If time lags before the account is replenished, the institution may charge additional ‘sustained’ overdraft fees, and a bank is also able to charge for multiple overdrafts before the account is replenished.”
“Financial institutions take advantage of consumers fighting desperately to stay afloat. CFPB should require that overdraft fees be reasonable and proportional to the cost to the institution, much the same way that credit card penalty fees are regulated. Overdraft fees should also be limited to one per month and six per year.”
What happens next? Many of the smaller banks make so much money on overdraft fees that they have little incentive to reform. The larger banks like JPMporgan Chase, Bank of America, and Wells Fargo, however, could in theory spur a change, given that they don’t rely on overdraft fees for much of their revenue.
One simple way to reform these practices is to simply deny charges when consumers do not have the funds in their account to pay for them. That would stop the chain dead before it has a chance to snowball on the consumer, and it would stop the banks from offering unregulated de facto credit products to consumers who can’t afford them.