Bank Fees Generate Profit, Threaten Consumers

American banks could collect nearly $40 billion in customer fees this year, according to new industry estimates. And now some members of Congress say it's time to overhaul rules that govern these fees. Personal Finance Expert Alvin Hall discusses the budding congressional effort and what customers can do to avoid excessive fees.

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MICHEL MARTIN, host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

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But first, money. It was just a year ago when the nation's financial system seemed on the brink of collapse, with the nation's leading banks requiring huge infusions of federal money to survive. Yet many of these same banks are now reporting hefty profits. Why? Bank fees are a part of it, especially overdraft fees. Those are the fees banks charge when someone writes a check or orders a debit that exceeds the amount in his or her account.

The Washington Post reports that American banks could take in up to $38.5 billion in overdraft fees this year. That's more than double the amount of fees they charged just 10 years ago. And now, some members of Congress say they are ready to step in if banks don't put a stop to what they consider excessive fees.

Joining us to talk more about this is TELL ME MORE's regular contributor on matters of personal finance and the economy, Alvin Hall. Welcome. Thank you so much for talking to us.

ALVIN HALL: I'm glad to be here to talk about this.

MARTIN: How come?

HALL: Because I've watched this period of fee madness, as I call it, get worse and worse and worse. On the one hand, we bailed out the banks. We, the taxpayers, gave the government the authority, in essence, to bail them out. And now, after we've helped them, they hit us with higher fees. Why? Because they are just being greedy. They say it's to help their bottom line, to help them be more stable, to help them be profitable. But in reality, it's simply exploitative.

MARTIN: Well, how do you decide what's an appropriate fee or not? I mean, that's the - I think the question that arises is that obviously, if you're getting hit with a $35 fee for a $20 overdraft, you're not happy. But who decides what's an excessive fee?

HALL: The people who decide the fees are the banks. They decide how much money they think this can generate as a profit, when they're sitting in meetings. And then they decide to raise the fees by a certain amount. Recently, I think, most of them have gone up around four or five percent. And all of it is falling directly to the bottom line.

MARTIN: Why has the revenue from fees increased so dramatically in such a short amount of time? And who decides what's an excessive fee?

HALL: The fees have increased dramatically because most people have switched over to debit cards instead of writing checks. When you're using a debit card right at the till or the check out counter, you can go over your limit very quickly and all of a sudden, you're in overdraft. And for a while, the banks were not required to disclose those fees to you in advance. They were just built into the charges that came with your account. Now that has changed. And it's the banks that decide how much these fees will be. People sit in meetings, they'll say we're losing revenue in this side. Where can we generate revenue? Which people are in essence the most vulnerable? And those are the accounts that they typically go after.

If you look at the people who have high net worth, they generally get these services at no cost. It's the average American who ends up paying all these fees.

MARTIN: Wait a minute, you're saying that some people don't have to pay these fees? Why not?

HALL: In many cases, if you have a great account with a high balance at one of the private banks, you get your overdraft services for free.

MARTIN: There are those who would argue, well, it's your responsibility as a consumer to know how much is in your account and the banks are actually providing you a service by honoring that debit, so that you're not faced with embarrassment when you're trying to, say, buy your groceries or put some gas in the car and that, you know, charging a fee is appropriate for that, that's a service.

HALL: I totally agree with that point, that you should be responsible. For me, it's the amount of the fees. I worked on Wall Street for 27 years now and what I've observed is that with new technology, everything is getting faster and cheaper.

If you look at the charges that brokerage firms have, they're getting cheaper because technology has made this much less of a people or hands-on job. Why isn't the same thing happening at banks? Why can't the banks do this? Recently, there was a pensioner in London. And this pensioner went over his balance by a small amount, for a very short period of time. The lady at the till put in 50 pounds, instead of five pounds. It was a horror in London. It made the news that this happened.

And the banks gradually, because of pressure, lowered their fees from 38 pounds for a bounced check, the equivalent of around $60, down to five pounds. Why can't we do that in the States?

MARTIN: So, what you're saying is the actual cost to the banks of covering these overdrafts is fractions of pennies?

HALL: Oh, absolutely. New technology has made this fast. When Barney Frank said recently that he thought it was cumbersome for the banks to give the accountholder the ability to say yes or no, when they're actually shopping at the cash register. It's not that hard to do anymore. However, banks would argue, oh, we have to phone up. No, it all comes up in a little machine that you swipe your card through, you're about to go overdrawn, do you want this transaction, yes or no? It's that simple.

MARTIN: But couldn't the bank argue that they're actually making you a short-term loan. And that because it's a short-term loan, they're entirely, it's within their rights or it's a reasonable thing for them to charge you, in effect, interest.

HALL: I think it's reasonable for them to charge interest but not interest that can add up to 10 times the amount of your overdraft. Banks just see this now as a guaranteed cash flow stream. And they say, let's grab the money while we can.

MARTIN: So, what are the changes being contemplated?

HALL: One of the changes being contemplated is to make the amount a proportion of the amount being overdrawn. So, therefore if you're only going overdrawn by $10, maybe the fee might be one percent or 10 percent of that, something much more reasonable. Another is to force them to lower the fees overall. The third option is to make the banks advice people when they open the account that they're getting this overdraft facility and then give them the ability to say yes or no.

MARTIN: So, in the same way that if you go to an ATM machine that's outside of your network, for example, and they say we're going to charge you $3, do you still want to proceed?

HALL: That's exactly right.

MARTIN: You're saying that they would - now, you know, Congress imposed new restrictions on the credit card industry earlier this year. Why don't they do something about debit fees or overdraft fees then?

HALL: I think the banks were saying, we're in deep trouble. You can't put regulation on us now. We're trying to deal with the problem of all of these toxic assets on our books. So, let's leave everything in place right now. And as soon as we get that stabilized, we'll turn our attention to that. And they haven't. What they did was to raise the fees, which was unconscionable.

MARTIN: All right, any final thoughts for consumers who are sort of thinking about this?

HALL: The consumer needs to monitor his or her account, so they do not go overdrawn and therefore get hit with these excessive fees. On the other hand, the banks should not feel that they are entitled to charge these huge fees for people who go overdrawn by a small amount. If I were overdrawn by a $1,000, a $35 fee wouldn't strike me as unreasonable. But when the fee is six or seven times the amount that I'm overdrawn, I feel abused.

MARTIN: Alvin Hall is our expert on personal finance and the economy, our money coach. He was kind enough to join us from our bureau in New York. Alvin, thanks again.

HALL: You're most welcome.

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