Bank Fees on the Rise

I knew that banks collected an exorbitant amount of money every year in overdraft fees, but I had no idea that they were "banking" this hard (pun intended).

According to a recent article on FT.com (link below), US banks stand to collect a staggering $38.5 billion dollars in "fees from customer overdrafts" in 2009.

This number is nearly double what was collected in 2000.

According to the article, the largest banks charge the highest overdraft fees. Bank of America, Citigroup and JPMorgan Chase are amongst the leaders in charging the highest overdraft fees. Are you surprised?

So why have overdraft revenues risen so dramatically in the past decade?

Two main reasons:

1. Banks have increased overdraft fees to compensate for revenue deficiencies in other areas. According to the Consumer Federation of America, "five of the ten largest banks have raised their overdraft fees in some way in the last year".

Does this mean that they will lower their fees once their other revenue streams start to improve again? I'll let you answer that one yourself. Legislation is the only way that these fees will actually decrease.

2. Due to the recession, people have less money and see their account balances go negative more often.

This is the really unfortunate part of this story, as its the people who are really hard up for money who are paying the most overdraft fees.

As a matter of fact, according to the article, 90% of total overdraft revenues came from 10% of the 130 million checking accounts in the US.

These are mostly going to be people who live from paycheck to paycheck, struggling to keep their heads above water. Students. Families who suddenly have to survive on one income due to a job loss. Etc. Etc.

The exact people who can't afford to pay the fees.

How do the banks justify these fees?

According to the article, Nessa Feddis, general counsel at the American Bankers' Assocation, said that "the higher fees are appropriate because big banks do not know their customers as well as small community banks, and need to be compensated for the higher risk".

Banks also make the argument that customers want overdraft protection, and that they are simply providing a service to their customers.

The fee increases don't stop there.

Many banks have dramatically hiked credit card interest rates for even their best customers over the past couple of years.

Banks were supposed to use TARP funds to start lending money again - money that would help to re-ignite the economy.

Instead, many banks have chosen to use the money to pay down their debts, invest or purchase other banks.

All the while, many of these banks are jacking up overdraft fees and credit card interest rates, which ends up causing serious distress to many people who are struggling to make ends meet. And, in addition, a number of banks (despite massive losses) are paying out billions and billions of dollars in bonuses like it's business as usual.

Anything wrong with this picture?

Source: FT.com - Banks Make $38bn from Overdraft Fees

Filed under: General Knowledge