When a bank’s income from overdraft fees is higher than net income, eyebrows tend to rise. That’s the case in nearly 45 percent of banks, according to the research firm of Moebs Services. By the end of this year, total overdraft fees collected is projected to exceed $38.5 billion, and the President and some members of Congress are fighting mad. The Obama Administration has been vocal about its desire to create a mammoth watchdog agency to oversee many of the details of our financial lives, including bank fees. Now two bills, one in the House, and another one introduced by Senator Chris Dodd (D-Conn) will seek – among other things -to force banks to get the customer’s permission before charging an overdraft fee. Meanwhile, critics ask… whatever happened to personal responsibility?
How high are bank fees?
Overdraft charges are nothing new, and certainly anyone with a checking account should be aware of them and how to avoid them. Moebs Services says that this year, the average overdraft fee has bounced from $25 to $26, higher at Wall Street banks. At banks with more than $50 billion in assets the average overdraft fee is $35.
Whether the fed should protect us from ourselves or not is a matter of opinion. Still, it does seem like a good idea to ask a simple question… why are bank fees on the increase? One banking official sees it this way:
“It’s a balance sheet problem. Banks have to generate revenue to make up for the losses in other areas,” he says. Most banks are publicly traded entities, not unlike WalMart or Macy’s. They have to return value to their stockholders, and with revenue plummeting through low interest rates and high mortgage defaults, they have to replace the income just like any other business that hopes to keep its doors open. “Banks look at a negative account balance as a short term unsecured loan. There’s a risk attached. Banks have the right to charge for a loan.”
Taking a critical view of his own industry, this banking official added that banks aren’t particularly friendly, and he wouldn’t be surprised if regulation did occur. If that happens, he says, a lot of consumers who aren’t currently getting adequate information might be able to benefit from increased government involvement. Speaking for himself, he spends a great deal of time with new accountholders making sure that they understand what transactions will trigger fees and how to avoid them. If there are regulatory changes, he would like to see the fees disclosed in layman’s terms so that bank customers don’t end up underwater.
Whatever your attitude about this subject, when customers overdraw their accounts, there is a real cost to the bank, and the bank has to:
· Be able to recoup the expense
· And have a meaningful vehicle to discourage customers from overdrafting.
If banks cannot recoup the cost of overdrafts by charging the customers who create them, they will have to make up the losses in other areas. That could mean punishing the wrong customers, by paying lower rates on savings accounts and CDs.
Even so, those who say we need a literal act of Congress to reverse the trend of rising fees seem unconcerned about the fate of banks.
"People out there are getting whacked", Senator Dodd told reporters. "They should have the right to say, 'Deny me the transaction.' "
In other words, Dodd wants banks to have to alert the customer that a pending purchase will throw them into an overdraft situation. It used to be that banks refused to pay transaction if the customer didn’t have the funds. With the rise in debit card use, the sheer number of bank card transactions has soared, and with it, the tendency to overspend available funds. At some point, banks began to pay transactions whether or not the funds were there (up to a preset limit) and then charge for what amounted to a short-term loan in the form of an overdraft fee. Dodd would like to see a reversal of that trend, forcing banks to get permission to pay the transaction.
So, let’s say you enjoy a lavish meal in a fine restaurant and attempt to pay with your debit card, but your account balance is insufficient. Chances are, the purchase would still be paid (within limits) and you’d later find out you were overdrawn and hit with a bank fee for the privilege of borrowing money. If Dodd has his way, when you attempt to pay from insufficient funds you would receive a message alerting you to that fact and giving you the option to “pay anyway” and accept the fee. You could of course, find an alternate way to pay like using a credit card or cash or … washing stacks and stacks of dirty dishes in the restaurant kitchen.
How can accountants help clients avoid high bank fees?
The obvious answer is, advise them how to keep better track of their money so they don’t overdraft.
Bank account holders can opt out of overdraft protection, meaning, if they don’t have the money, the check or debit will not be honored. Or, they can go elsewhere. Money-rate.com allows consumers to shop around for a better deal.
Al Manbeian, founding partner of GPS foreign currency brokerage firm, comes from years of experience with some of the nation’s top financial institutions. According to Manbeian, banks have some room to negotiate. Like any business, they need to compete in order to attract and maintain strong clients. That means clients who are coming from a position of financial strength should be able to ask for better rates, on everything from residential mortgages to business working capital lines of credit.
For customers who are less financially strong, Manbeian still recommends they try to negotiate with their current lenders to bring their rates down. Or, they can look at alternatives to commercial banks. Some institutions are able to charge lower fees because they have less of an overhead burden. GPS is a prime example. Through a combination of economies of scale and streamlined overhead, they are able to offer clients an attractively priced product set for foreign currency exchange transactions. CPAs with clients who deal in foreign currencies can help clients avoid excessive fees and add value to those clients by connecting them with a banking alternative like GPS.