Debit Card Overdraft Fees a Big Money Maker for Banks

Posted by Sara M. Varese
Debit cards have been long thought of as a convenient and responsible way of spending, however, as consumers overspend on their bank accounts, banks are charging high overdraft fees, turning it into a significant source of income for banks – expecting to bring in $27 billion in revenue this year.
Consumers can incur an over draft fee for each instance of an overdraft. For example, a consumer can go over as little as $0.50 and incur a $35 overdraft fee – however, if they decide to make another transaction at $5 that can incur another $35 fee, making it a $75 fee for a total transaction of $5.50. And because consumers use debit cards far more than credit cards, banks make far more in overdraft fees than in credit card late fees.

Most consumers would not agree to overdraft service if they had known the terms and conditions of overdrafting, however, the problem is that they usually do not know. Banks usually do not disclose this and neither do they have to. In 2005, the Federal Reserve ruled that overdraft charges must be covered by the Truth in Lending Act – a law designed to protect consumers in credit transactions by disclosing all fees and costs of the lending arrangement. On the contrary, the Federal Reserve has observed “marketing practices that appear to encourage consumers to overdraw their accounts” by some banks.

So what does the banking industry have to say about all this? They say that overdraft service is done as a favor for their customers, saving embarrassment from situations such as a card decline during dinner and that everyone should know what they have in their bank accounts. How about being able to opt out of overdraft service? Many banks do not give that option and neither do they have to disclose the service. What about notifying the customer at the register that they do not have enough funds? The banking industry explains that the technology is not in place to do so and would take a lot of investment by retailers to replace the current system.

According to Michael Moebs, an adviser of banks and credit unions, 45% banks are so dependent on overdraft fees as a source of income that they make more in overdraft fees than in regular income, resulting in them going out of business if they couldn’t charge these fees. And currently, the banking industry can’t come up with another source of income that could quickly replace that of overdraft fees.

This posting was brought to you by Pay1Day.com, a web-based company specializing in providing consumers immediate cash assistance and advises consumers to spend and use credit wisely.

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