At the end of last month, although I knew the funds in my checking account were running low, I nevertheless chose to pay for lunch with my debit card. I calculated that I had enough left in my account to pay for the $12.87 Fatburger, fries, and lemonade, but, as I would later find out, I was actually short $7.48—I hadn’t adequately accounted for filling up a tank of gas.
As a Bank of America customer, however, I was spared the embarrassment of having my card declined because B of A automatically enrolls its clients in an overdraft protection service (you can’t opt out). As a result, I was able to enjoy my lunch courtesy of the fine folks at B of A.

But what had originally been a $7.48 overdraft suddenly ballooned into a $77.48 checking account deficit: Because I bought the burger and fries first and the lemonade in a subsequent transaction, I incurred two $35 overdraft fees. There was no sort of alert—the card wasn’t declined, I had no idea.
It used to be that banks simply wouldn’t let you overdraft—you either had the money or you didn’t—unless they deemed you to be a reliable customer, in which event they might let it slide without a fee and simply debit your account the next time you made a deposit.

That was then. This year, the banking industry will stealthily loot more than $38.5 billion from customers’ checking accounts in “overdraft protection services.” According to a recent New York Times article on the topic, 45 percent of banks in the United States make more in overdraft fees than they do from traditional banking. Seventy-seven percent of big banks in the U.S. now automatically enroll clients in overdraft services, and many, like Bank of America, have made it nearly impossible to opt out.

When a bank charges you an overdraft fee, what they’re really doing is charging you interest on a loan. To pay for my burger, I effectively had to “borrow” $7.48 for a cost of $70. Banks, however, would prefer that neither their clients nor regulators interpret this transaction as a sort of loan. If they are loans, then they become subject to the Truth in Lending Act. The TLA stipulates that lenders have to disclose to the borrowers the interest rate they’re charging on an annualized basis. If overdraft protection fell under the act’s purview, banks would be forced to get clients’ approval before enrolling them in an overdraft program. This is why, in 2004, banks strong-armed the Federal Reserve into saying that overdraft protection was a service, not a loan, effectively exempting overdraft charges from TLA regulations.

Assuming that we think of overdraft fees as loans, though, what does the interest rate come out to? It all depends on the size of the overdraft and your bank’s fee. According to a Federal Deposit Insurance Corporation study, if you were to overdraft your account by $20 and incur a modest $27 fee that you paid back two weeks later, you would be paying an annualized interest rate of 3,520 percent. In my case, that number turned out to be much higher. (B of A charges $35, the industry average, up from $10 in 1999.)

Now, I hear the argument that we all ought to be more financially responsible, and that this problem could be avoided by only spending what we have in our bank accounts. But if that’s the case, then shouldn’t banks give you the choice of having overdraft services in the first place? The issue here is not one of financial irresponsibility on the part of individuals, but of predatory and opaque practices by the banks. Consider that, as reported in the FDIC survey, 93 percent of overdraft fees are being paid by only 14 percent of bank customers. My guess is that Warren Buffett probably doesn’t overdraft his checking account very often, so that 14 percent represents a different slice of American society.

Pressure from legislators, together with a string of negative press, prompted B of A and Chase to announce on Tuesday that they would redesign their overdraft programs, giving customers greater flexibility, including the choice to deactivate overdraft services. This is an admittedly positive development, but it is also a barefaced attempt to stanch the regulatory wave before it breaks. The fact remains that the banking industry, even B of A and Chase, will continue to rely heavily on revenue from overdraft services because most people don’t have the time or the stomach for the aggravation of overdrafts, which are often just the result of the bank taking too long to credit your deposits. Most people just let it slide and consider it a cost of their overly busy days. And that’s just how banks make money. And for a variety of reasons—information overload for consumers, concentration of market share—the market hasn’t been able to sort it all out. Absent real regulation, the burden will continue to fall on the shoulders of the middle and working classes.


Clay A. Dumas ’10, a former Crimson associate editorial editor, is a social studies concentrator in Lowell House.