Remember when we thought giving Americans a choice about whether to enroll in their bank's overdraft protection program would cut down on the amount of Americans' money banks were able to siphon off? Six months after the "opt-in" rule went into effect for checking accounts, the opposite is happening.
Suzanne Kapner of The Financial Times finds bank customers are chomping at the bit to sign up for overdraft protection and the high fees that go with it:
New research from Moebs Services, which analyzes financial data, shows that about 100 million of the 130 million U.S. checking account holders are on track to pay overdraft fees on ATM withdrawals and debit cards.
Among consumers who are overdrawn 10 or more times a year -- usually low-income people who can least afford the extra fees -- the "opt in" rate is higher, at nearly 98 percent.
As a result, Moebs expects banks to charge a record $38.5 billion in overdraft fees in 2011, up from $36.5 billion in 2010.
Craig Siegenthaler of Credit Suisse said some banks have "opt-in" rates as high as 90 percent. Notable exceptions are Bank of America, which last year stopped allowing customers to overdraw accounts on debit card purchases, and Citigroup, which has never allowed overdrafts on ATM withdrawals and debit-card purchases.
And just in case we've forgotten what overdraft protection really is -- a short-term loan at a rate of interest ranging from high to absurdly high -- here's Kapner:
"A 2008 Federal Deposit Insurance Corporation study found that a $27 fee for a two-week overdraft of $20 would be equivalent to an annualized interest rate of 3,520 percent."
I have to admit I'm surprised so many consumers are opting in. Part of it is probably attributable to convenience; people want to be able to make the purchase at the point of sale, even if they've accidentally spent all the cash in their checking account. Probably another contributing factor is lack of awareness of that incredibly high interest rate, coupled with aggressive marketing from banks.
But for some of those 98 percent of low-income bank customers opting in, I think the driver is a lack of sound options for small, short-term loans, especially for people with troubled credit histories. We're in a time of incredible economic stress for a lot of families, and a lot of people are living paycheck to paycheck and aren't always going to be able to make it until they get paid again, no matter how much they've scrimped and saved.
Banks, for the most part, don't offer small loans, and I'd bet a lot of people are hesitant to go to a title loan place or a pawnshop to solve short-term liquidity problems because they're afraid of being victimized by high interest rates and predatory loan terms, and/or losing their stuff. Credit cards would be a much better option, but they are only open to those with good enough credit to qualify for one, a group that's smaller now thanks in part to tighter lending standards adopted by banks.
For a big chunk of the 14 percent of banking customers that pay 93 percent of overdraft fees, that leaves bank overdraft protection as the favored solution. It's convenient, it's offered by big banks that consumers probably trust more than title lenders and pawnshops, and it allows customers some financial flexibility at an interest rate that, while monstrously high, is largely hidden.
But I doubt the problem lies entirely with the marketplace. I think for some, using overdraft protection as a borrowing facility allows them to stay in denial about the true state of their finances. Taking out a short-term loan takes deliberate action; it takes facing up to the fact that you don't have the funds to get by for the week and taking action to remedy the problem.
In contrast, overdraft is a passive action; you simply use your debit card as you normally would and take out de facto loans to cover each purchase automatically.
What do you think? Am I off-base? Why do you think people love overdraft protection so much?