We've complained about overdraft fees at banks in the past, and discussed how overdraft fees are like payday loans… at banks. It's time for us to rant about overdraft fees again.
At a recent conference held at the Federal Reserve in Chicago, there was a great panel presentation that included a discussion of bank overdraft fees. One of the panelists compared overdraft fees to payday loans.
Here's a snippet from one of the presentation slides:
OD are Payday Loans at Banks
- Credit based on access to bank account
- Due in full immediately, repaid by next pay
- Triple digit or higher rates to borrow
- Not based on ability to repay
- Consumers tend to get trapped in repeat borrowing
We agree that overdraft fees can be quite unfair to consumers, particularly when they are charged for overdrafts at ATM or point of sale machines. Studies have shown that consumers are simply not aware that they could possibly be charged an overdraft fee when they use their bank issued debit card at an ATM or at a point of sale terminal. Consumers (wrongly) think that the bank will simply decline the transaction if there is not enough funds in the account. Unfortunately, this is not always true — in 2008, a shocking 81% of banks allowed overdrafts at ATM machines and point of sale terminals.
The FDIC estimates that the APR of a typical overdraft is an astonishing 3,520%!
Compare this to payday loans, with APRs of 200%, 300%, etc. Also, with a payday loan, borrowers are actively seeking out the loan for a specific purpose. With overdraft loans, consumers are blindsided with high fees that could have been avoided.
If you want to see the original powerpoint presentations from the conference, you can see them at the website of the Chicago Federal Reserve.