GETTING OVER OVERDRAFT

Abstract

Bank account overdraft fees have not always been with us. Overdraft privileges as a paid service became common in the 1990s, when it was introduced by banks as a convenience for account holders who ran out of funds with checks outstanding and would rather have them honored than returned. What began as a modest add-on service to select customers quickly morphed into a profit center for banks (and credit unions), with estimates of total fees paid ranging up to $30 billion a year. Now, $30 billion is real money even for a banking system as large as America’s: The biggest banks were making over $1 billion a year on overdraft fees, while overdraft income grew to an astonishing 20% or more of earnings for smaller ones. Overdraft fees, effectively interest on loans, are extremely high cost given the small amount of money loaned via an overdraft, the short term of the loan, and the minimal chance of default. As a result, overdraft fees result in nearly pure profit for the bank (or credit union).