Biden Proposes Limiting Overdraft Fees to $3
A well-meaning concept with obvious pitfalls.
AP (“Overdraft fees could drop to as low as $3 under new Biden proposal“):
The cost to overdraw a bank account could drop to as little as $3 under a proposal announced by the White House, the latest effort by the Biden administration to combat fees it says pose an unnecessary burden on American consumers, particularly those living paycheck to paycheck.
The change could potentially eliminate billions of dollars in fee revenue for the nation’s biggest banks, which were gearing up for a battle even before Wednesday’s announcement. Exactly how much revenue depends on which version of the new regulation is adopted.
Banks charge a customer an overdraft fee if their bank account balance falls below zero. Overdraft started as a courtesy offered to some customers when paper checks used to take days to clear, but proliferated thanks to the growing popularity of debit cards.
“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” President Joe Biden said in a statement. “Banks call it a service — I call it exploitation.”
Under the proposed rule, banks could only charge customers what it would cost them to break even on providing overdraft services. This would require banks to show the CFPB the costs.
Alternatively, banks could use a benchmark fee that would apply across all affected financial institutions. Regulators proposed several fees — $3, $6, $7 and $14 — and will gather industry and public input on the most appropriate amount. The CFPB says it arrived at these figures by looking at how much it cost banks to recoup losses from accounts that went negative and were never paid back.
According to research conducted by Bankrate last August, the average overdraft fee was $26.61. Some banks charge as much as $39. The nation’s biggest banks still take in roughly $8 billion in overdraft fees every year, according to data from the CFPB and banks’ public records.
Biden has made the elimination of “junk fees” one of the cornerstones of his administration’s economic agenda heading into the 2024 election. Overdraft fees have been at the center of that campaign, and the White House directed government regulators last year to do whatever is in their power to further curtail the practice.
“We are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine,” said Rohit Chopra, director of the Consumer Financial Protection Bureau, in a prepared statement to reporters.
In theory, at least, this seems reasonable. Charging someone $39 for a simple mistake seems egregious, especially since those most likely to overdraw their accounts are those living on the margins.
But the second-order effects here seem rather obvious. These same customers are otherwise the least profitable. If someone keeps a balance under $500 in their account, the bank isn’t exactly making a fortune on interest loaning out their money. And, if they overdraw their accounts, merely breaking even on the extra work this creates for the bank hardly seems worth it.
So, won’t the people who Biden is trying to protect simply wind up unbanked?
This, on the other hand, seems like a more obvious route:
Banks could also provide small lines of credit to allow customers to overdraft, a service that would operate like a credit card. Some banks like Truist Bank currently offer that type of service.
Here, a small error in overdrafting would probably still cost the customer something like $3 but a larger overdraft would cost more. But it would presumably be a preferably alternative to bouncing the check.