Overdraft Fees: Mend 'Em, Don't End 'Em
Did Bank of America do the right thing by eliminating overdraft protection?
More noodling this morning. I've mostly been sleeping since I wrote last night about Bank of America's decision to end overdraft protection on its debit cards, but I've also been thinking about it a bit more. And I remain.....skeptical.
First things first: I've been slagging banks for years about their overdraft fees, and now that BofA has boldly eliminated overdraft protection entirely I'm about to slag them for that. Am I just unappeasable?
I don't think so. Here's the thing: overdraft programs themselves have never been the problem. They're a genuine customer convenience. The problem has been the massive abuse of overdraft programs by big banks: high fees, multiple fees per day, reordering of fees, advertising campaigns that encourage customers to think of overdraft protection as a virtual line of credit, etc. So when a BofA executive says, “What our customers kept telling me is ‘just don’t let me spend money that I don’t have,’ ” I don't believe them. I don't doubt that some customers are saying that, but it's vanishingly unlikely that even a majority want overdraft protection to end completely, let alone most of them. What their customers want is fairer overdraft protection, and BofA's choices weren't limited to either having overdraft fees or eliminating them entirely. There are lots of good intermediate measures. For example:
- The law now says that customers have to opt in to overdraft protection. BofA could have simply implemented this.
- They could give customers the option of opting for overdraft protection only for purchases over a certain amount. This way your major purchases would always go through but you wouldn't accidentally end up paying $40 for a cup of coffee.
- They could simply reduce overdraft fees from their current ridiculous level to, say, $5 with a limit of one fee per day. This would still be profitable, would be a genuine customer service, and wouldn't be transparently exploitive.
- Even better: they could implement a sliding scale of overdraft fees: say, $2 for purchases up to $20, $5 up to $100, etc.
- Even better still: they could simply treat overdrafts as high-interest loans. Charge a small administrative fee (a dollar or two) plus 30% interest until the overdraft is paid off.
But BofA didn't do any of these things.1 They just eliminated overdraft protection entirely even though many of their customers would probably benefit from it. Why?
Well, call me suspicious, but I can't help but think that they're hoping for a backlash of some kind. I honestly don't know what they might have in mind, but it just doesn't make sense to eliminate overdraft protection entirely. Other alternatives are simpler, better for consumers, and more profitable for Bank of America. Something just doesn't smell right here.
1The best alternative, of course, would be for consumers to be asked at the point of purchase if they want overdraft protection to kick in. Unfortunately, current technology doesn't allow that. The card swipers in most retail outlets just don't have the capability to do this.