Debit Card Overdraft Fees Provide Easy Profits for Banks

It’s not uncommon for a large majority of Americans to carry a hefty amount of credit card debt. Therefore, it naturally follows that a lot of people are cutting up the plastic and turning to another kind of plastic: debit cards. Debit cards promise the convenience of a credit card, but are advertised as a more prudent way to buy. Banks and credit unions have long marketed debit cards by pushing their positive aspects. However, just when we thought it was safe to assume that banks were “bailed out”, it seems they’ve found yet another way to boost their income. By charging debit cardholders “overdraft fees”, banks can make a large income during a time period when they are losing in other financial arenas. In fact, banks are expected to bring in $27 billion this year alone by covering overdrafts on checking accounts.

But who’s to blame, really, for overdrafting on a checking account? Isn’t it the consumer’s responsibility to make sure they aren’t spending more than they have available? Banks argue that it is as simple as consumers watching their spending. But what if the person being charged a $35 overdraft fee each time is your elderly grandma or your mentally ill brother? Ruth Holton-Hodson is an example of one of these cases: her brother is mentally ill and lives in a halfway house. He has a debit card to pay his rent and to buy an occasional pack of cigarettes or a sandwich. When Ruth’s brother started to fall behind on rent, she intervened on his behalf. When going through his finances, she discovered that he had accrued $300 in overdraft fees within three months. She then spent two years asking Bank of America to issue her brother a debit card that wouldn’t allow him to spend more than was available in his account. After obstinately refusing for several years, Bank of America finally granted her request and said the situation was a “complicated issue without any simple solutions”.

However, according to critics, the situation isn’t as complicated as the banks would like the public to believe. In fact, critics argue that the banks purposefully manipulate the order of a customer’s transactions in a way that makes it confusing to know what money has already been taken out of their checking account. Mr. Ralph Tornes is pursuing a lawsuit against Bank of America for this specific problem. Specifically, he alleges that he was charged $500 in overdraft fees in 2008 after the bank rearranged his purchases from largest to smallest–making it difficult to know what money was still available to spend.

In light of the current economic crisis, it is difficult to believe that banks are innocently charging overdraft fees without the ultimate goal of raising their profits when they are losing money and getting “bailed out” by the government. Moreover, the Federal Reserve admits that they knew about the issues with overdraft fees back in 2001 and then stated in 2005 that they knew that some banks had “adopted marketing practices that appear[ed] to encourage consumers to overdraw their accounts”. However, to this day, the Federal Reserve has done very little to protect the little guy from the banks’ cash cow of overdraft fees.