Saviors Or Villains – Part 2

A couple of months ago, I’d written about the controversial subject of overdraft protection in my post called Saviors Or Villains?

On the back of the increasing realization that banks cannot extend overdraft protection for free, I’d predicted the debate to center around how much fees banks can charge for extending overdraft protection and at what point they should inform their customers about it.

In the aftermath of the heated debate that raged through the American financial industry for the past six months, the second topic has been addressed. As per recently introduced regulation, banks can charge fees for overdraft after Aug 15 only if their customers opt-in to their overdraft protection programs – in the the past, enrolment was automatic at the time of account opening. The new regulation is only applicable for ATM withdrawals, store checkouts and other one-off transactions. For repetitive direct debits, such as those set up for automatic payment of telephone and utility bills, overdraft protection will continue to apply as in the past. This shows that the regulator and the general public have acknowledged the good deed done by banks in bailing out people whose accounts run dry when such bills come due. Without this protection, people would end up paying far more to their telcos and utilities by way of penalties and reinstatement charges than the US$ 25-35 fees levied by banks for extending overdraft protection.

Having scored a win on the topic of “when should banks inform customers”, consumer protection groups have turned their attention to the interesting subject of “how much can banks charge”.

FOX Business reports that a coalition of consumer interest groups comprising of the Center for Responsible Lending, the National Consumer Law Center, Consumers Union, the National Association of Consumer Advocates and the Consumer Federation of America has urged the American regulator FED to adopt additional rules to make overdraft fees reasonable and proportional to the bank’s costs. The subtext makes it obvious that, according to consumer interest groups, banks are overcharing for providing overdraft protection.

This is likely to get interesting.

Already, a few banks have vehemently opposed any form of regulation to decide overdraft protection fees. According to Robert A. Steen of Bridge Community Bank, one of the bankers quoted in the FOX Business report, fees are “outside of the role of the Federal Reserve. We decide what we charge for our products and services …”.  Can’t fault this viewpoint in a a free market, can we? Besides, banks could argue that additional staffing is not the only cost of providing overdraft protection, with others like risk premium – the cost of covering the credit risk introduced when banks extend overdraft – being very difficult to estimate.

I think we’re somewhere at the halfway mark of this debate. Watch this space!