Overdraft Hustle

There's been quite a few stories trumpeting the banning of bank overdraft fees; a ploy a younger Noonan fell victim to repeatedly while trying to make a dollar out of 15 cents after moving to Washington DC. I was broke. And the banks dinging me $30 every time I overdrafted for spending a few bucks on a Metro ticket (or whatever else) certainly wasn't helping. Now, clearly I should have been keeping a closer eye on my balance. But I was young and dumb and had lots of other things holding my attention. Anyway, overdraft fees weren't actually banned, as Kevin Drum points out. Instead all they did was tell banks that they have to give customers the option of keeping overdraft protection. And because most people do, banks will continue to cash in on a system that encourages people to use digital money while flirting with a ginormous penalty:

Unlike checkbooks of old, debit cards are marketed as routine payment devices, and since debit cards don't have built-in check registers that warn you when your account is getting low, it's all too easy to inadvertantly run up big overdraft charges.  But the new Fed regulations do nothing about that.  Under industry pressure, they ruled in 2004 that overdraft fees weren't loans, and they still aren't.  So a $35 fee on a $17 overdraft that's paid off in five days —and yes, this is the industry average — amounts to an APR of over 10,000%.  Except it's not an APR because it's not a loan.  It's a "fee."

Hogwash.  It's a small, short-term loan, just like a credit card charge.  The APR should be somewhere in the neighborhood of 10-30%, like a credit card, with perhaps a small processing fee added to that. And since we live in an electronic era, that processing fee is small: maybe 50 cents or so.  A dollar max.

But the Fed did nothing about that.