And They Say the Banks are Struggling?

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Banks are Struggling

Source: web

$32 billion. That’s the magic number and it’s what American banks made in just overdraft fees last year. And guess what? We’re the ones shoveling it over to them time and again. Whether it’s because we can’t balance our checkbooks or maybe we just find ourselves running short every few months, we’re more than happy to pay those hefty fees to ensure our checks clear the bank, even when our available funds don’t cover them. Even as we’re frustrated and full of complaints about having to pay them, we continue to run short and then rely on them from saving us from the embarrassment of a check that didn’t clear our accounts.

Moebs Services Research

These numbers are courtesy of Moebs Services, which is one of the most recognized economic research firms in the country. And the $32 billion total for 2012 is up by more than $400 million in 2011. Moebs president, Michael Moebs, says that not only are the numbers up, they’re not likely to ease in the coming years, either. He goes so far as to say this year and the years after, until at least 2016, will likely break records. The latest record stands at $37 billion in 2009. Think back to that time period.

The recession had settled in, the mortgage crisis was gaining momentum, the foreclosure count was on the rise and the employment numbers were declining just as fast. The closer references were the number of Americans who found themselves without a checking account because of those overdraft fees that they could no longer pay. In hindsight, it really was a struggle for millions. Fast forward a few years, and one look at the number of unbanked and underbanked Americans is proof positive of just how bad things had become in those early months of the recession.

The study also found that of those who do have checking accounts, one quarter of them have “frequent” overdrafts and each time they do find themselves paying those fees, they’re paying, on average, $40. That’s massive for most families simply because it’s often not one single overdraft charge. In most instances, it’s several at a time and at that rate, it could significantly cut into their monthly income. And if you’re wondering what one quarter of these consumers total from a numbers perspective, you should know it’s 38 million. Taking it a step further, of those 38 million, 57 percent of them – or 20 million – routinely turn to payday check cashing lenders to bridge the gaps. But here’s where it really gets interesting. For many of these consumers, payday loans are cheaper.

Moebs explains,

Payday lenders are the low-price source for short-term cash needs. You can get a cash advance for $16 as opposed to $25 at a community bank, $27 a credit union and $30 at bank or thrift.

There’s been controversy, especially over the past few years, about the increase in fees that banks are trying to put into place. This is a direct result of the new financial laws that banks are adhering to and a big part of those laws are the limitations placed on various fees.

NSF Fees and Payday Loans

But there’s more. Those banks that have been able to increase their fees, especially NSF fees, have been doing so every opportunity they saw. Meanwhile, these payday loan companies have actually decreased their fee structures over the past twenty four months. Unfortunately, the banks don’t see that and worse, they’re missing out on opportunities to gain those fees from those consumers who, despite their best efforts, can’t seem to avoid paying them at times. And those consumers, the report concludes, would much prefer keeping their business with their banks. They’re simply not willing to pay the higher fees.

Let’s face it, overdraft fees are a rich source of revenue for banks, even with the controversy. It matters little how much of the fees are being recouped from the bank to actually provide the service; the banks are more interested in upping the bottom line. Worse,

It’s very clear that banks are gouging customers with incredibly high and outrageous overdraft fees that are not related to their cost,

said Ed Mierzwinski, consumer program director at U.S. PIRG.

Overdraft Protection Act

There’s a bit of Shakespearean drama in this story though because the report was released the same time a new bill was introduced in Congress. If it passes, banks will once again find themselves at a dry hole that once was a rich and somewhat unending source of profits. The Overdraft Protection Act of 2013, if it passes, will require bank fees to be both “reasonable and proportional.”

Where’s the Truth

But there’s another problem too. There are reports that suggest the bank fees aren’t overpriced and that the cost of offering the overdraft services are higher than what many are being led to believe. In fact, even Moebs says that the big banks only earn about $3 per overdraft charge. He points out that it’s also the same amount that a payday lender would earn, on average, for every $100 loaned to consumers. He says it’s the overhead that eats up most of the bank’s overdraft fees. Still, he agrees that lowering those fees would equate to more customers.

That being possible, of course, if more unbanked and underbanked consumers were able to find themselves again in the good graces of a bank. There are no guarantees, though, that history wouldn’t repeat itself. If it seems like a catch 22, you’re not alone.

The best alternative is obviously reining in spending and getting a step ahead so that overdrafts aren’t a possibility, or at least, aren’t as big of a possibility. Checking your account online or by phone is one way to stay on top of things and it can help those who tend to forget to record checks written in their registers. Also, debit card transactions are often culprits associated with overdrafts. Finally, because more than half of checking account customers aren’t even aware that they have an overdraft service. And those who do admitted they have no idea what the costs are for this add on bank service.

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.


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