Question: How Much Do Banks Earn From Overdraft Charges?
Happy New Year! Welcome back to school. I know that banking tends to be a unit that many of you teach early in the semester so this data should prove particularly timely. I have posted on this topic several times but have some new data to report about the three largest U.S. banks and their fees from overdraft charges (from Financial Times, subscription required):
This quarterly data on the three largest banks shows how fees tend to grow over the course of the year as evidenced by the quarterly data from 2015. So, back to the question about how much they are charging for overdrafts…Let’s make the math easy and say $400mm per quarter or $1.6 billion a year for each of the three banks totaling $4.8 billion for the three of them combined. Some other nuggets from the FT article:
- CFPB is considering some new regulations: “The Consumer Financial Protection Bureau has been considering restrictions on overdraft charges. Later this year, though, it looks set to propose a new set of rules.”
- Overdraft charges now exceed other types of credit that are generally perceived as predatory: “annual charges for overdrafts, many of which are inadvertent, now amount to more than certain other forms of credit — pawn shops, payday lenders and tax-refund anticipation cheques — put together.”
- A consumer banking lobbyist described overdrafts in the following way: “We view overdrafts as a consumer choice,” he says. “In this market, there are very few opportunities for many consumers to obtain the short-term liquidity they need.”
Why is this important to your students?
- Overdraft IS a consumer choice. Ask your students whether they chose to opt in for overdraft protection on their checking account. We have a great bank role play so students so students can practice prepping for opening a checking account. We also have a Fine Print activity in which students analyze a checking account agreement to learn about these and other fees. They can “just say no” to overdraft and avoid these fees altogether.
- Novices not paying attention to their account balances incur a large percentage of these fees (which average about $34 per transaction). Let a student share their experience at discovering this $34 fee they paid for a $5 or $10 transaction. We have a mini-activity to help students learn how to set up alerts on their checking account. Here’s some data on the types of alerts that consumers typically set up.
Still looking for more resources to help your students understand overdraft fees and how to avoid them? Check out the NGPF Checking Lesson: Beware of Checking Fees!
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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