Overdraft Fees from Banks Produce Billions in Profit

The rest of America may be in a recession, but banks will be getting a windfall this year. In 2009, United States banks will collect $38.5 billion in overdraft charges. Interestingly, only 10% of customers pay almost 90% of these fees. The $38.5 billion in overdraft fees is almost twice the amount of fees banks collected in 2000. To the surprise of many industry analysts, overdraft fees have actually risen this year despite the recession. While the median overdraft fee in 2008 was $25, it rose to $26 in 2009. With Wall Street banks, the median overdraft charge is a whopping $35. Overdraft fees have become a massive source of capital for banks and a prodigious burden on consumers.

The Shocking Data

Moebs Services conducted the research that led to the finding of the $38.5 billion figure. The firm surveyed 2,000 credit unions and banks and discovered that 44.5% of these financial institutions reported higher net revenue from overdraft fees than their net incomes. Increased overdraft fees have helped banks sustain profitability in the throes of the recession. Some experts point to government-mandated increases in overdraft fees as the culprit behind widespread increases. For instance, if your local post office increases its overdraft fee to $30, other retailers in the area will notice and raise their fees as well. Ultimately, banks do the same.

Affected Consumers

For the most part, the consumers who are paying the bulk of these overdraft fees are cash-strapped with poor financial management skills. Typically, they have credit scores of 590 or below. These customers are usually unaware of the dwindling balances in their checking or savings accounts, and so they end up unwittingly overspending. For this reason, consumer advocacy groups are calling for more transparency for these customers. For example, when balances reach a certain point, banks might notify their customers by email, text message, or automated calls to keep them from overdrawing their accounts.

Avoiding Overdraft Fees

Here are some ways you can avoid costly overdraft fees:

• Monitor your balance online. Some banks even allow you to receive alerts indicating your balance periodically via text message. Make sure you account for checks that you’ve written that have not yet cleared.
• Remember automatic bill payments. Consumers often forget to allow for upcoming automated bill payments they have scheduled for utilities, cell phone bills, insurance, etc.
• If you’re unemployed, call your bank. Some banks will waive overdraft fees under certain circumstances if the customer is currently unemployed. Your bank also may be willing to waive the fee if it is a one-time occurrence.