Banking, finance, and taxes

Overdraft Fees: The Endless Profit Center For Banks

bankThere are so few profit centers that banks can count on anymore. Many of the largest financial firms are still losing money on derivatives. Consumer credit default rates are rising. Commercial real estate may be the Armageddon for some banks. The only recent bright spot for financial firms last quarter was investment banking. That may be short-lived if the stock and bond markets stop advancing.

One thing that the banks can count on is the fact that many consumers will overdraw their accounts. This is probably a more frequent occurrence during a recession when money is tight. Data from Moebs Services which recently appeared in the FT shows that US banks will collect roughly $38 billion in overdraft penalties this year. That should make up for a lot of their losses from other sources. The Moebs data shows that people with the lowest credit scores are those who pay the lion’s share of the fees. This cost of  banking undoubtedly adds to their financial stress.

The first instinct of the Congress will be to seize this data as a reason for cutting what banks get from unwitting consumers, but in reality the banks take a risk that some customers will overdraw accounts time and again costing the firms time and effort and the risk that money drawn down by these customers will not be repaid.

Taxpayers still own pieces of several large banks. The fates of those they do not own could change if the credit system gets tight again. There is no guarantee that some firms that have repaid their TARP money will not have to come back again for more. The government’s process of saving the credit system may not be over. Every time a bank collects a fee it is a step closer to making money. Abolishing the charges may be popular but it puts another straw on the camel’s back of the banking system.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.