Regulating overdraft fees
September 10, 2009 | alternatives, customers, industry | Comments (0)We agree with this column at SeekingAlpha:
The pro-overdraft fee argument is not without merit – the fees allow banks to offer free checking services to many customers, and the fees are frequently the product of customers paying insufficient attention to their finances. However, weak disclosure coupled with the common bank practice of batching each day’s debits and paying them in descending order of size does tend to expose economically vulnerable customers to cascades of overdraft fees. The standard bank justification for this practice – that larger payments are more likely to be more important ones – is sometimes true but frequently not, and based on my discussions with bank managements, is much more of a fig leaf for fee-maximization strategies than a genuine reflection of concern for customers’ well-being.
So what to do? I actually think the bill proposed by my Representative, Carolyn Maloney, is quite sound. It doesn’t ban overdraft fees, or even cap the amount, but does require much better disclosure, including disclosure of a fee prior to approving a transaction that would incur one, and the ability to cancel the transaction instead. Critically, this would be required even for debit transactions, which tend to be smaller and thus the most costly to consumers. Her bill would also preclude banks from pursuing fee-maximization strategies, even if a more benign-sounding justification for them can be found.
You simply can’t have too much transparency.
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