There have been several media stories lately about the financial services industry. Nothing new there. Newspapers have been running the typical mix of stories: corporate greed, regulatory oversight, industry losses, etc. However, recently there has been a lot of coverage dedicated to the realm of fees, and specifically, how bank/credit card fees are at the center of all that is evil in the world.
Consumer "Watchdog" groups are now lobbying Capitol Hill to introduce legislation that is meant to slash banks' abilities to levy unfair fees against consumers, and as a result everyone will live in complete economic harmony. First, let me say that some of this legislation is good. The way banks have been changing interest rates on prior transactions is simply unfair, and modification of this practice is a good thing. However, attempting to curtail fees that banks collect will make banking more expensive for everybody. This is a fact. If people could take an emotional step back they would see that this is the only possible outcome.
Let us for a moment consider just one of the fees that is receiving attention: Overdraft fees. I will pause here to give a cursory explanation of the product. Overdraft protection was created to protect people from having their charges, checks, or debit purchases rejected for insufficient funds. In other words, banks allow people to spend money they do not have so they won't have to be embarrassed when their payment gets rejected because they have no money.
Overdraft protection is a product that people lobbied banks for years to have, and millions of people currently depend on it. Logically, the bank charges you a fee to use it. Why? Because this program is expensive to run. Banks make money in two very simple ways: Fees and interest. These accounts typically do not collect any interest, so that leaves fees.
Let me be incredibly clear at this point: without fees there will be no overdraft protection. Now you may ask why are the fees "ridiculously" high. There is a simple reason for that as well. Hundreds of thousands of people who overdraft their account (people who borrowed money interest free) never pay back what they borrowed. Banks lose money on every single one of these people. Somewhere between 5 and 10% of customers walk out on their bills right now, and that number is rising. That means a lot of fees need to be collected to keep this service viable. Want to get mad? Stop blaming banks, go kick your neighbor in the shin for being a dirt-bag, and tell him to pay his bills.
Now we know why fees are charged and why those fees are so high. However, there are a few more points commonly made in the media that should be discussed. First, there is a lot of grumbling over how transactions are processed. The claim often made is that banks process payments in a way that maximizes the fees it can charge clients. One such way is that banks process larger dollar payments first, and therefore can charge fees on a bunch of smaller transactions if the large dollar payment drains the account. The process is technically correct, but the rationale is completely flawed. When overdraft accounts were first created payments were processed more or less chronologically. Consumers were the ones who demanded this process change since their $3 milk purchase trumped their $1000 mortgage payment. The banks switched, and now are chastised for doing so. The bottom line is if people want to bounce payments on items that can repossessed, the banks will do it. Only please don't complain when a payment for something important gets rejected. You have your milk, do drink it.
Another popular argument is that people don't know about these fees until they are charged. This is simply ludicrous at this point in the digital age. The first thing people ask when they open an account with a financial institution is, "What are the fees?" When you buy anything you ask this question. To prove my point, if you go to any major bank website and type "Fees" into the search bar you will get a list of them. In case you are too lazy to check, I typed "Overdraft Fee" into the Bank of America search engine and got this: click me. This link takes you to a page where you can choose to see more details on a product and it has a huge button that says "Rates & Fees". These are not hidden fees. There is no small print. Forget for a second that the news has run story after story on bank fees, consumer awareness, predatory lending and so on for the past couple of years. The real issue is that people want to blame someone else for the fact that they do not want to spend 2 seconds to read about what they are buying. Stop complaining and start reading.
The last thing major point being made in the news is that overdraft protection is an opt-out type of product. This means that everyone gets it unless they specifically state that they do not want it. For some banks this is true, and for others it is not. This is a no-win argument for banks. If this was an opt-in product, clients who did not have overdraft protection would call the bank (and thousands do every day) to complain that the bank did not clear their purchase. You are all familiar with sentences that start. "I have been a loyal customer for over XX years...." or "I have over XXXX dollars in my other account why would you not cover a check for XXX...." or "I get paid every XX days and I would have paid you back....". Have you ever made a call like that? I bet some of you have. If you haven't you would if you bounced a check for $40 when you simply forgot to transfer funds from another account to cover the payment. Overdraft protection is primarily an opt-out product for this exact reason. It does benefit people when they really need it, and you only really realize when you need it until after you use it.
I don't like paying fees just as much as you don't. In fact, I would be happy to never pay another fee in my life. However, does that mean that I believe Congress should pass national legislation over what a bank can charge for a service it provides? No. If overdraft fees are restricted or capped this lost revenue will be will be subsidized by people who are responsible with their money in the form of other fees.
If I had a dollar for every time I heard someone say, "Where is my bailout" I could have retired 50 times over. The answer to that is, "In your neighbor's pocket." Those bailout funds go towards paying for every person who does not pay their bills. In turn, banks can keep their doors open to you. How does that help you? That allows you to avoid living in a place where you need to buy everything with cash that you keep under your matress (including houses, cars, etc). That allows you to collect interest on your money (when the government actually raises interest rates). That allows you to not bury money in your backyard to keep from worrying about robbers. In other words, you can continue to live a civilized life. There is your bailout. Don't like it, thank your neighbor and give 'em a kick in the shin for me.
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