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We trust our banks to keep our money safe, and usually, they do just that. But can we trust banks not to charge us excess fees at the first opportunity? Well, that’s a different question altogether. Lots of people unknowingly get stung by big fees for withdrawing cash or for going over their agreed overdraft.
In fact, according to the report by CNN Money and SNL Financials in 2016, just three of America’s banks charged a cumulative $6bn in fees for overdrafts and ATM withdrawals, a huge amount of money. The issue of bank fees and charges escalated so much in 2016 that it became part of the presidential campaign, with both Hillary Clinton and Bernie Sanders heavily criticizing the amounts banks charge for simple services.
What Are These Fees, and How Profitable Are They for Banks?
Most banking customers now pay more than $4 when they try to withdraw money from a machine that is not in their network. In other words, an out-of-network cash machine can charge you a 20% fee when you withdraw $20. It is hard to argue that the true costs to banks are anywhere near that much.
Next, banks can charge big fees when customers take their accounts into an overdraft. Where people choose to opt in to what’s called “overdraft protection,” the fee for making use of the facility can be as high as $35 each time. Just paying for a $3 coffee with a debit card can trigger a fee of $35. Again, there’s really no way that arranging an overdraft can cost a bank anything near that amount.
Since 2015, banks are required to publicly disclose how much they are collecting in fees and charges. Though ATM fees have drawn the most attention, the $6bn collected by the three large banks actually contain a massive $5.1bn in overdraft fees. Clearly, overdraft fees are a huge proportion of the fees banks charge their customers.
Overdraft Protection Puts Consumers at Serious Risk
It is easy to see how the numbers can quickly add up. Why do banks collect $5.1bn in overdraft fees so easily? Well, consumers opting in to overdraft protection don’t always notice that they are making use of it. A couple of coffees and some grocery shopping later, and a debit card holder can easily find over a hundred dollars in applied fees to their account.
The effective APR implied by these overdraft fees is enormous, easily over 10,000%. No rational consumer will pay an APR that high, yet consumers inevitably end up spending billions of dollars on overdraft fees. Something must change, and in the absence of a ban on high overdraft fees – which hasn’t emerged since the 2016 elections – it will have to be consumer behavior that changes.
What Consumers Can Do to Avoid High Overdraft Fees
Staying on top of your personal finances is the most important step. Banks can’t charge you an overdraft fee if you don’t make use of overdraft protection. So, keep an eye on your balance to make sure there is enough for your daily living expenses, and for the bills and charges you expect to come in before your next payday.
What if you simply run out of money? Well, you could try one of the many overdraft apps on the market. Overdraftapps.com has a good overview of some of the better apps. Apps vary from the free to use for small amounts to apps that charge a little bit in monthly fees but that offer free borrowing.
Essentially, overdraft fees are sprung on unsuspecting consumers who don’t keep a close eye on their banking affairs. To avoid becoming a victim of high bank charges, customers must make sure they watch their bank balance and pro-actively put money in their account if they’re at risk of going in the red.