What's the Right Cure for High Bank Fee Rates?

Senator Christopher Dodd is reportedly planning on introducing legislation to curb high bank overdraft charges. These charges have been on the rise lately, as banks look for various ways of shoring up profitability. Certainly, overdraft charges can seem excessive, but is legislating against them really the right solution?

According to research firm Moebs Services, the average overdraft fee has increased from $25 to $26 this year, but these fees are even higher among major Wall Street banks. Banks with over $50 billion in assets charge an average of $35 for overdraft fees. These fees have become a significant source of income for the banking industry, with total revenue from overdraft fees projected to exceed $38.5 billion this year. For 44.5% of banks, overdraft fee revenue actually exceeds their net income.

One way to look at these fees is that they are like extremely high interest on a loan. However, there is a genuine cost to banks when customers overdraft their accounts. Without a means to recoup those costs -- and just as important, without the ability for banks to create a meaningful disincentive for customers to overdraft their accounts -- overdrafts could further weaken the financial soundness of the banking industry.

Besides, it's not as though bank customers don't have choices. First of all, they can avoid overdrafting their accounts. Second, they can opt out of overdraft protection -- the vast majority of banks allow customers that choice. Finally, if customers don't like a bank's fee policy, they can always use money-rates.com to start shopping for another bank.

If banks are forced to eat the expense of overdrafts, they will make up the costs elsewhere, such as by offering lower savings account interest rates or CD rates. Overdraft fees may seem overly punitive, but legislating them could end up punishing the wrong customers.

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