TWO VIEWS • Are overdraft fees for bounced checks good for customers, or are they better for bankers?
On the surface, it is easy to criticize overdraft fees, especially when you hear stories of multiple fees charged for several small purchases. But as with most issues, there is another side - one that reflects the potential downside to all bank customers if the wrong approach is taken.
Perhaps the best way to understand overdraft fees is to look at the overdraft process - both with and without overdraft protection provided by a bank. In both cases, let's start with a customer writing a $100 check at a local grocery store. The grocery store deposits that check in its own account. The store's bank then attempts to post the $100 check against the customer's account, which only has a balance of $50. It is at this point that the story differs.
In the case where a bank offers overdraft protection, the $100 check presented by the local grocery store is still paid, and a fee of say $30 is assessed on the customer for the overdraft. In this example, the customer now owes the bank $80.
When there is no overdraft protection, the $100 check is returned to the local grocery store. The bank may still assess a penalty for the returned item, and another fee - often more than $30 - is frequently assessed by the grocery store. The customer is now $130 or more in debt to their local grocery store and he or she has been assessed a bounced check fee.
The local grocery store may refuse to accept future checks from this customer, and such customers may be reported to agencies such as ChexSystems, potentially preventing them from writing checks to other merchants. And let's not forget that writing bad checks is a crime.
A recent study of bank customers, conducted by independent market research firm Ipsos-Reid, shows that 82 percent of bank customers paid no overdraft fees in the previous 12 months. Of those that were assessed an overdraft fee, 77 percent said their bank covered the payment that caused the fee. Importantly, of those who had their item paid, 96 percent said they were glad the payment was covered. Only 4 percent said they wished the bank had refused the payment.
The vast majority of customers who inadvertently overdraw their account and have their item paid by their bank appreciate the service. They are pleased to have been spared the inconvenience, embarrassment and potential costs of having a payment or transaction rejected. They understand that their bank took a risk in making this accommodation, and they recognize that the fee is also a deterrent against future overdrafts.
So what are the options for the 4 percent of customers who didn't want their bad check or debit transaction covered by their bank? Avoid overdrafts, opt out of overdraft protection services or change banks.
Customers have a right to understand the products they choose to utilize, including potential fees. Moreover, intense competition means that consumers have many places they can deposit their hard-earned dollars. In other words, if customers aren't happy with the service they are receiving, they can change banks.
Emphasizing choice is not to say that safeguards for consumers aren't necessary. In fact, as with all products and services offered by traditional banks, overdraft protection programs are and should be regulated. Just in the past week, the Federal Reserve adopted new rules prohibiting fees for overdrafts on ATM and one-time debit card transactions, unless the consumer opts into the overdraft service for those transactions.
Moreover, the consumer must be given a notice that explains the overdraft services, including fees and choices. In addition to these new regulations, many banks are also voluntarily addressing customer concerns about overdraft programs.
Despite these efforts, some members of Congress still want to arbitrarily and severely limit the overdraft fees banks can charge and the services they can provide. History shows us that such government price controls simply do not work. The result is always less consumer access to products and services and higher prices. And in this case, it would mean that local businesses would be forced to deal with a greater number of returned checks and rejected transactions.
Fees should be viewed as a deterrent - like a parking ticket - for overdrawing one's account. And in reality, they are avoidable. Banks offer many useful tools to allow customers to verify balances and monitor account activity, such as online banking, 24-hour phone banking, ATMs and checkbook registers.
Other services that can help us avoid overdrafts include direct deposit for immediate access to our paycheck and links between our checking account and savings account, credit card or line of credit. Furthermore, if we do make an honest error, we can always visit our local bank branch and talk to our local banker about our options.
Linda W. Navarro is President and CEO of Oregon Bankers Association. She lives in Salem.