I'll Gladly Pay You on Tuesday...

by Ron Daly 

...for clearing my bad check today! Has overdraft protection (aka courtesy pay) seen its last days? It started with a desire to help consumers when their accounts were overdrawn. Instead of returning a non-sufficient funds item and charging a return fee on each end, some institutions began paying the check and collecting a slightly higher fee. The consumer would then repay the financial institution when their next paycheck or deposit was made.

But, as is typical, the road to ruin is paved with good intentions. 

Larger banks saw the opportunity to let people drive themselves and their accounts into the red. Not only would the person be responsible for paying off all the money they'd spent (unknowingly, in some cases), they'd incur a fee for every debit on their account. Bank of America was recently raked over the coals for paying the higher dollar amounts first so that more of the smaller transactions would incur the $35 fee, According to the Associated Press, consumers pay as much as $17.5 billion every year in overdraft fees. consumers pay as much as $17.5 billion every year in overdraft fees.

A full year after the collapse of Lehman Bros., lawmakers are still looking to point fingers and tighten the vice on financial institutions. Now, congress-people like Senator Dodd and Rep. Barney Frank are working on legislation that will regulate overdraft fees. Many major banks, including Bank of America, Chase and most recently Wells Fargo, have backpedaled on their overdraft policies and have begun to offer "opt-outs" to consumers who would rather not deal with overdraft protection. Still, many believe that it's "too little, too late" and that congress will increase the laws and regulations around overdraft fees regardless of the banks' willingness to change their mind on the topic.

Some folks in the industry aren't happy with the bad rap laid on them because of overdraft fees. Dan D. Graham of Flora Bank and Trust of Illinois took the time to list out five complaints from the view of the banker. A portion of his list:

"You assert that banks let customers overdraw their accounts without their knowledge. BULL! First and foremost it is the customer’s responsibility to manage their checking account. Who else is going to know if they have money in their account besides them when they write a check? Once again though we are taking personal responsibility out of the individual’s hands, blaming someone else, and asking the government to control our lives. Can you get Senator Dodd to remind me to go to the bathroom; I’m not smart enough to do it myself?"

The debate raged on at the annual convention of the New Jersey CU League between industry leaders (read the full article here) and Jeffry Pilcher of the Financial Brand recently wrote an article, "5 ideas to fix the ugly in overdraft fees", that lays out some facts on overdraft fees and the public opinion on said fees (the public thinks they suck, no surprise). Other than making overdraft protection opt-in, Pilcher brings up balance alerts as a means of making people more aware of the money they're spending and when it's going to run out - even so far as an alert at point-of-sale.

So, the $64,000 question - What is the right stance on this? Should the industry rethink our policies on overdraft protection and change our practices, or are the practices helpful and the public should step up their money management skills with our help?  

Does courtesy pay/overdraft protection help or hurt the consumer? Tell us what you think in the comments section.

Comments

[Chuck]

Guess I still don’t get it totally. Opting in is great. But who wouldn’t opt in? So, really, are there people out there who would rather the financial institution RETURN their check (unpaid), still charge the NSF fee and then have to then pay the merchant they wrote the check to another fee? AND – if it was an electronic payment (debit card or online bill pay service) they would rather the payment NOT be processed, thus making them incur A LATE FEE from the company they are attempting to pay? Really? Wow – frustrating.