What Ever Happened to Overdraft Outrage?

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Who would voluntarily pay $38 for a $3 cup of coffee? Apparently, tens of millions of American bank customers—that’s who.

The $38 price tag for that cup of Joe comes as a result of paying for it with an overdrawn debit card. A $35 overdraft fee is the cost a consumer pays so that his bank doesn’t decline the debit card swipe. It’s like a bounced check fee, only people use their debit cards way more often (and often, much more thoughtlessly) than they write checks.

Now way back in 2009, when reformers pushed the overdraft debate to new heights, consumers seemed pretty agitated over overdraft fees, and understandably so. In one survey, 80% of debit card holders said they’d prefer such charges would be declined rather than get hit with a $35 fee each time a charge was accepted with insufficient funds in the account.

When new laws mandated that overdraft protection change from opt-out to opt-in service—only those who agree to the fee structure would be charged in such a scenario, whereas in the past everybody was automatically signed up—the banks launched campaigns talking customers into overdraft protection and all of its accompanying fees.

Apparently, these campaigns have done the trick. While there’s some disagreement as to how many customers actually opted in to overdraft protection—I’ve seen estimates of 22%, 30%, and 46%—the most frequently quoted figure lately is a whopping 75%. Three-quarters!

That’s the figure from economic research firm Moebs Services, whose data has been cited by the StarTribune, the Financial Times, the WSJ, and BankRate.com, among others. Here’s some perspective from the man in charge of gathering that data, courtesy of the StarTribune:

“Just because people are signing up for overdraft protection doesn’t mean they like the fees,” said Michael Moebs, economist and founder of the Lake Bluff, Ill., firm that bears his name. “Many just don’t have the resources to go without” overdraft protection.

So far, 100 million of 130 million checking account customers have voluntarily enrolled in overdraft protection, which means they will continue paying the fees when their accounts dip below zero. Moebs points out that’s more people than voted in the last presidential election.

The banks should like this detail contained in Moebs data: The people who have a history of overdrawing their accounts—folks who have paid more than 10 overdraft fees a year—and who therefore are most likely to continue overdrawing their accounts, are the ones who are most likely to have opted in for overdraft protection after the reforms took place. So far, 98% of these customers have signed up for the service.

It’s customers like these who ensure that overdraft fees will continue to be highly lucrative for banks. These fees—which can be the equivalent of a loan with an annualized interest rate of something like 3,520%—are expected to pull in $38.5 billion for banks in 2011, up from $36.5 billion last year.

In the past, when customers were automatically signed up for these services and the possibility of the accompanying fees, it was easy to point to the bank as the obvious bad guys. Now that the system is opt-in, the customers who voluntarily sign up for overdraft protection and overdraw their accounts have to shoulder the responsibility.

Don’t get me wrong: The change doesn’t make the banks the good guys in any way. For one thing, the banks have justified adding all sorts of new fees to checking accounts partly because they anticipated a sharp drop in revenues collected via overdraft fees — and there hasn’t been a decline in these revenues at all. So why all the new checking account fees? That’s a whole ‘nother issue.

In the StarTribune story, Rick Hartnack, a U.S. Bancorp executive, offered his insight as to why so many customers signed up for overdraft protection, a service that’s fairly likely to hit them with fees down the line:

They’d rather pay a fee than have a supermarket cashier or a restaurant server tell them their payment has been rejected. “For many people, the possibility of having their checks rejected may be threatening to their self-worth and image,” Hartnack said.

Michael Moebs explained it a different way:

“Bubba and Bubbette want to have their romantic Valentine’s Day weekend, and they’re going to overdraw to do it,” Moebs said.

Call me crazy, but do I detect some level of judgment and disdain in Moebs’ tone? Could Moebs possibly be hinting that people who opt in for overdraft protection and knowingly overdraw their accounts are idiots?

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