The Breakdown | Explaining Southern California's economy

How marketing saved bank overdraft fees

New rules apply to banks for charging overdraft fees
New rules apply to banks for charging overdraft fees
Kristian Dowling/Getty Images

Here's BusinessWeek on the Consumer Financial Protection Bureau's decision to instigate a new probe of bank overdraft fees:

In November 2009, the Federal Reserve moved to rein in the high fees that banks charged consumers who overdrew their accounts when making debit-card purchases or withdrawing cash from an ATM....

In theory, that should have dealt a major blow to the overdraft business.... [But] overdraft fee revenue to banks from ATM and retail purchases was still on track to top $16 billion last year, just a 16 percent drop from its peak in 2009, according to Moebs Services, a banking consultancy. The rates are still so high in part because many banks launched aggressive marketing campaigns to get customers to sign up, with letters, calls, and e-mails that at times were alarmist warnings of what would happen if you didn’t opt in.

Bankers, for their part, say it wasn’t marketing that led consumers to sign up—it’s because consumers want the ability to overdraw their accounts in a pinch. “This can be a way of getting piece of mind,” says the American Bankers Association’s Richard Riese. He says even if a consumer didn’t fully understand the overdraft fees when he signed up, he’d get notice of the fee on a monthly statement and could opt out at any time. “The light bulb would have gone off real fast if it wasn’t what they wanted,” he says.

Which is a strange way of thinking about banking. I'll get peace of mind by spending more money than I have and be thankful for the bank stepping it to cover my back — for a considerable fee? Sounds more like a formula for lost sleep.

Banking is actually so simple for most people that this kind of deceptive marketing is the sort of thing they should be able to overcome without even needing the CFPB to step in. It's called a savings account, and with most banks, it's possible to link it to a checking account, so that if the checking account runs dry, it automatically transfers funds from the savings account. 

This is handled entirely electronically and doesn't cost the customer anything. In fact, the consumer can even make money — although not very much — in interest on savings. It's smart, for the average person, to keep at least a few hundred bucks in a savings account. You don't want to go crazy. Your emergency fund, for example, could be too big to keep on hand in a low-interest savings account. But that's three-to-six months of expenses. It would be better in short terms certificates of deposit or special savings accounts that pay higher rates.

We need the CFPB. But do we really need them for stuff like this? Overdrafts have been around for long enough for most financially literate people to know that they're a total rip-off.

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