If there’s ever been a reason for consumers to consider prepaid debit cards, the $32 billion in overdraft fees that were paid to the nation’s biggest banks last year is the perfect justification. Is it time for you to bail on your big bank? The fact that there are many new prepaid card products on the market today – with lower fees and less invasive restrictions – is quickly becoming a long overdue escape for millions of consumers. Many consumers are unhappy with those rising overdraft fees, but so many are trapped and can’t seem to get a step ahead of the game to break the cycle. Many thought once the recession began easing, those same consumers would be able to turn it around. That hasn’t happened, though. And the fees continue to rise.
$23 Billion in Overdraft Fees
This latest report from Moebs Services provides the numbers and it’s the collective overdraft revenues that are causing some to do a double take. They totaled $32 billion last year and it’s up from 2011’s numbers -easily showing an increase of more than $400 million or 1.3 percent in that timeframe.
Consumers use of overdrafts shows no indication of going away, and is actually increasing,
said Michael Moebs, who wrote the study and published the findings. He also warns that if things continue at the pace they are today, new records will be shattered in just a few years.
Currently, the highest year on record was 2009, just as the recession was seeping into every American home. That record year earned bankers a whopping $37 billion. Not only that, but the study shows that 25 percent of those with traditional consumer checking accounts – or 38 million consumers – “frequently” went into an overdraft status at a median cost per overdraft of $40.
Prepaid Debit Cards
Prepaid debit cards, of course, eliminate that in its entirety since consumers can only spend what they have available on their cards. But it gets worse. Of those 38 million consumers who are against the wall with overdrafts make their situations worse by turning to payday loan companies. The shock is that these companies, once the black sheep in the financial sector, are actually more affordable than going into overdraft; indeed, they’re “significantly” cheaper according to the report.
Moebs explains that a cash advance will cost less money to use for two weeks. Not even the credit unions can beat that.
You can get a cash advance for $16 as opposed to $25 at a community bank, $27 a credit union and $30 at bank or thrift. Those are median prices.
The numbers and fees continue to rise at many financial institutions; however, the price of borrowing from a payday lender has dropped. The median charge for a $100 cash advance dropped $1.50 from 2011 to 2012, from $17.50 to $16.
Self Inflicted Wounds
The banks have taken massive, albeit self-inflicted, hits in recent months. The lawsuits, the mortgage robo-signing scandal, the so-called London Whale, accusations of partnering with drug lords in Mexico – take your pick. This is just one more reason why many consumers are simply bailing on their banks with any conveniences not worth it for them.
The Consumer Financial Protection Bureau is working to find better solutions for consumers without alienating the banks, who, when it gets right down to it, aren’t unrealistic with the fees themselves, it’s just the rising costs that has CFPB’s interest. It, along with other consumer watchdog groups, has said these revenue generators are “deliberately higher” than what it costs the banks to provide the convenience to their customers. Current estimates are that the big banks make about $3 on each overdraft charge, which equates to the same profit the payday lender earns with a $100 loan. Because banks have images and overhead, someone has to pay for them – and it’s the customers who found themselves with an NSF fee that shoulders it.
It’s little wonder so many are stepping into the debit card industry, including the big credit card companies like American Express. Its Serve card has no monthly or annual fees, offers a great phone app and allows customers to send and receive money by both texting and emailing. Plus, these consumers are enjoying the same benefits the credit card company offers its customers who carry the classic credit card. Purchase protection, roadside assistance and even access to entertainment events all come together to make this a great alternative for many.
Things are about to become a bit more complicated for the banks, too. A new bill was introduced earlier this month in Congress. The Overdraft Protection Act of 2013, if passed, will require these fees to be “reasonable and proportional.” Naturally, there’s bickering amongst the parties so if anyone’s looking for a quick resolution, it likely won’t happen.
It’s very clear that banks are gouging customers with incredibly high and outrageous overdraft fees that are not related to their cost,
said Ed Mierzwinski, consumer program director at U.S. PIRG.
The writing’s on the wall, though. For those financial institutions that step up to the plate, overhaul their fee structures and attempt to find that middle ground are the ones that will be able to maintain their customers. In this day and age, any bank that underestimates a single customer has far bigger problems that rising overdraft fees.
Making the Switch
Not ready to make the switch to a prepaid product? The same rules apply today as they always have. Pay close attention to your addition and subtraction in your checkbook, contact the bank if you find any discrepancies in your register and your monthly statement and link your checking account to your savings account. This will allow the bank to pull whatever funds are necessary to cover a check if your balance is too low. You’ll have to opt in for this and sometimes there are fees, but usually no more than a dollar or two per transaction – much better than $40.
If you are likely to overdraft, the main street institutions are your best choice – most credit unions and community banks and some of the thrifts – because they have a lower overdraft fee,
Another recent study, this time from the Pew Charitable Trusts, revealed more than half of American consumers who had overdrawn their checking accounts say they had no idea they had opted in for overdraft protection and worse, they didn’t know it cost anything. Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project, said this shows there is “a very high level of confusion” about how this overdraft protection works.
In many ways, the prepaid movement has built so much momentum by now, it would be hard for any bank to put a dent into the fast moving train, especially now that so many of them have alienated the average consumer. Millions transferred their accounts to smaller community banks or their local credit unions a couple of years ago when it was announced debit card fees were being put into place for at least one of the bigger banks. It failed miserably, but not before it lost millions of consumers.
Have your banking habits changed since the recession? Do you own a debit card? Have you secured a prepaid card for your kids? Let us know your thoughts about this shift in financial trends.