From The New York Times Overspending on Debit Cards Is a Boon for Banks
…Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.
In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.
But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer’s transactions in a way that causes more of them to incur overdraft fees.
“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending.
Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.
Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.
Felix Salmon adds:
…The main thing I learned is that there’s a big split between biggest banks in the US. On the one hand Citibank is on the side of the angels, one of the few banks which doesn’t have automatic overdraft protection on its checking accounts (if you want it, you have to ask for it). On the other hand, Bank of America and Wells Fargo are among the very worst banks, often refusing even when asked to turn overdraft protection off.
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And while back in July I said that 20% of bank customers pay 80% of the overdraft fees, in fact, according to the most recent FDIC report, it’s worse than that: the 13.9% of customers who get charged 5 or more fees per year pay a whopping 93.4% of the banks’ total fee income. And the 4.9% of customers who get hit 20 or more times per year are paying an average of $1,610 apiece in these fees. That’s money they really can’t afford.
