Overdraft Fees: Do We Need Them?

In case you weren't aware, modern banks make money through a multitude of avenues. For example, do you have a home loan? The bank makes money off of the interest of that loan, and really any other type of loan you take out whether that loan is for a car, home, boat, or something personal. Banks making money off of interest isn’t new, but there are some other things that are relatively new, at least in the US. While the first record of an overdraft fee occurred in the 1700's with the Royal Bank of Scotland, in the United States their appearance happened much later. According to USA Today, overdraft fees first occurred in the 1990's. This should come as no surprise given that things like credit scores didn't appear in an official capacity until the 1970's. Remember, if the punishment is a fee of some sort, then the punishment is intended for persons who do not have money and that’s true beyond the banking industry. Apparently, overdraft fees have been pretty lucrative for banks with revenue from overdraft fees being around $8.82 billion in 2019 according to data collected by the S&P Global Market Intelligence. What exactly are overdraft fees? Overdraft fees occur when an account is charged with a transaction that it isn’t able to cover. On average, overdraft fees cost around $35 per transaction and can add up pretty quickly depending on what the bank’s policies are. Some banks will also charge continuous overdraft fees on top of the initial overdraft fee- continuous overdraft fees are charged once every day the account remains in its overdraft status. According to the Federal Deposit Insurance Corporation (FDIC), customers have to opt-in to being charged overdraft fees and if the customer does not opt in, while they won’t be charged a fee, the bank can refuse any purchase that would overdraw the account. The FDIC also states that customers can opt out of overdraft fees by contacting the bank. Will overdraft fees last forever? Some suspect that eventually overdraft fees will disappear, but we doubt that. Remember how we said that fees are punishments for people who do not have money? Well, that’s part of the argument against overdraft fees. Especially with the uncertainty caused by recent events, banks should be looking at ways to retain their customers. Therefore, it would make sense if banks implemented policies and programs that help their customers succeed. However, it would be difficult for anyone to want to give up on a multibillion-dollar industry, so we doubt we’ll see those pesky overdraft fees disappear at any point in the near future. For the latest in news and stock picks, don’t miss our podcast at https://www.arbitragetrade.com/podcasts/