| | |  Business News | November 2009 
Limit on US Bank Fee Won’t Be Painless
 Robert Cyran & Martin Hutchinson - breakingviews.com
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November 28, 2009
Regulators and politicians are competing to rein in bank overdraft fees. The Federal Reserve decided this month that banks must receive customers’ consent before allowing them to overdraw their accounts. Other proposals in Congress go even further, limiting charges or prescribing the structure of fees.
Whatever changes come, however, customers this holiday season should not expect any free gifts from their banks.
Financial institutions have been collecting up to $30 billion a year in overdraft fees, according to the management consultants Oliver Wyman. Furthermore, the fees have been a big source of profit, accounting for nearly a fifth of the black ink at depository institutions in recent years.
Unfortunately, however, there is some evidence of questionable behavior on the part of banks. For starters, they have typically let customers overdraw without warning. Then the fees have kicked in, with disproportionate effect — 10 percent of customers pay up to 90 percent of overdraft-related fees, according to the economic research firm Moebs Services.
Alert customers would know when they were about to drain their accounts. And the banking industry points out that allowing automatic overdrafts in return for fees is convenient for many people, and relatively cheap compared with the hefty charges sometimes attached to returned checks.
With tighter restrictions coming on overdraft fees, some banks are already reducing charges. If that’s all there was to it, consumer and business customers would most likely be better off.
More likely, bank customers will end up paying in other ways. Even if they avoid writing checks that bounce, account maintenance fees may increase and banks could charge more for borrowing.
Or they may simply turn customers away — especially those with low balances that aren’t profitable without fee income — perhaps forcing them to other, far more predatory forms of lending.
That would not be a desirable outcome. On the other hand, moves like the Fed’s at least give customers a choice about paying for overdrafts. Given that excessive lending to weak credit was one cause of the recent crisis, that’s probably a better approach than forcing banks to reduce overdraft fees too much. Some new restrictions make sense, but they are unlikely to be painless for banks’ customers.
For more independent financial commentary and analysis, visit www.breakingviews.com.
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