In an age when even some libraries are waiving late fees for books, what makes banks think it’s a good idea to impose high overdraft fees on those less in? able to pay them?

Why do banks think people living paycheck to paycheck should pay $ 38 for a cup of coffee – $ 3 for coffee and $ 35 for onerous overdraft fees?

Yet this is what many banks are doing with pernicious overdraft fees. Ninety-five percent of those affected by overdraft fees in 2020 were financially vulnerable and disproportionately black and Latino, according to a FinHealth 2021 spending report. banking services for those who can afford to put enough money in their accounts to ensure that they will not be affected by the charges. Federal regulators, absent from the action, should step in and resolve this problem.

Some banks have reduced hated overdraft fees during the pandemic, but there is no guarantee they will not resume operations as usual.

In good news, Detroit-based digital-only bank Ally Financial announced this week that it will stop charging overdraft fees permanently on all of its banking products, something it had started doing during the pandemic. . Ally Financial was the first major US bank to do so. Other banks are expected to follow suit. Overdraft fees are basically very short term loans that can have an effective interest rate of over 1000%. Even the most shameless loan sharks don’t get that kind of vigor.

Last week, Senator Elizabeth Warren, D-Mass, told the Senate Banking Committee that Bank of America, JPMorgan Chase, Citigroup and Wells Fargo forced their customers to pay $ 4 billion in overdraft fees and people low-income earners paid most of the fines fees. That did not include regional banks, whose results are more dependent on fees, according to a Morgan Stanley report released on Tuesday.

But if a small bank like Ally “can step in and automatically waive overdraft fees for its customers,” as Warren tweeted on Wednesday, “giant banks can too.”

The fees can be financially devastating as they are levied on every transaction once an account is overdrawn. Before customers realize their accounts are short, they can charge many small fees, generating fees that can total hundreds of dollars. Some banks make matters worse by “reordering” fees and deposits to maximize the amount of fees. In 2019, banks made about $ 12 billion from overdraft fees and insufficient funds, according to the Center for Responsible Lending. Such practices discourage many people from opening accounts, leaving them “unbanked”.

Banks really need to rethink this.

If banks removed overdraft fees, “the majority of customers would not be affected, but the most vulnerable segment would be,” Lamont Black, associate professor of finance and real estate at DePaul University and former economist at DePaul University. Federal Reserve in Washington, told us. “Rather than trying to get as much profit as possible from this group, some banks are becoming more socially responsible.”

The average debit fee is $ 25, but overdraft fees can be as high as $ 35. Banks get most of their overdrafts from people who have an average of $ 350 in their checking accounts. Banks deserve to make a fair profit, of course, but they should do so in a way that distributes costs among customers in a more equitable and equitable manner.

Over the years, the federal government has made efforts to fix the problem, but for the most part it has dropped the ball, says Rebecca Borné, senior policy advisor at the Center for Responsible Lending.

And banks have been aggressively successful in getting people to accept overdraft fees through tactics such as adding a pre-verified form to those a customer signs when opening an account or presenting charges as a free service. And the rule doesn’t apply to direct debits or paper checks.

About 15 years ago, many banks started showing customers inflated balances of $ 1,000, in the hope that they would believe the highest number and overdraw their accounts, which many only found out that they were burdened with a lot of fees. In truth, that $ 1,000 was just the so-called “protection” against overdrafts – what the bank would cover in return for these loan sharks. The Federal Reserve intervened to end the practice, but federal regulators have been too lax since then, Borne said.

“What we’ve really needed for a long time is a rule that tackles fundamental abuses, including the size of the [overdraft] charges, which incites a lot of mischief, ”Borne said.

A $ 3 cup of coffee should cost $ 3, not $ 38. If the banks can’t figure this out, the federal government should explain it to them.

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