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$35 For a Cup of Coffee — Thanks to Overdraft "Protection"

July 9, 2009

Bank overdraft loans have not been in the news much lately, in spite of the fact that they will generate $38.5 billion in fees this year.   That’s almost twice as much as the $20.5 billion that banks will rake in from late-payment, over-limit and other penalty fees on credit cards.

Last night and this morning, however, ABC News Nightline and USA Today joined forces to provide a powerful one-two punch exposing the industry’s carefully designed tactics to extract these excessive fees from unwary consumers.  In many cases, like that of a truck driver interviewed by ABC who was hit with a $34 fee when he used his debit card for a $1.00 cup of coffee, the consumers are unaware that their banks have automatically enrolled them overdraft “protection” programs.  They mistakenly expect that a debit card purchase (or an ATM withdrawal request) will be rejected if their account lacks sufficient funds to cover it.

Both stories explain how a small army of consultants has helped the banks design their operations to extract the maximum possible fees.  The most important tactic is to sort a customer’s pending transactions so that the largest will be processed first.  Consider a customer with $400 in her account who uses a debit card to purchase a cup of coffee for $3, a greeting card for $2, a t-shirt for $15, a snack for $4, a magazine for $3, and some new furniture for $450.  If the furniture purchase were processed last, the five small purchases would sail right through.  But if the furniture purchase is processed first, each of the small purchases would result in a separate $35 overdraft loan fee – a total of $175 in fees for $27 in spending.

And both stories cite an FDIC study (pdf) of bank overdraft programs that reported that a fee of $27 on an overdraft loan of $20, if repaid in two weeks, amounts to an APR of 3,520%.   (That $34 fee for a $1.00 cup of coffee, if repaid in one week?  It comes to 177,286%!)  No wonder the banks are eager to make these loans whether their customers want them or not, and no wonder they used their powers to persuade the regulators to make these loans exempt from Truth in Lending rules that require APRs to be disclosed.

Previous AFFIL Blog posts on overdraft loans are available here.

(Photo: Phoney Nickle)

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