Magazine article American Banker

In Defense of Check Overdraft Coverage Policies

Magazine article American Banker

In Defense of Check Overdraft Coverage Policies

Article excerpt

There are times when bankers must feel that, no matter what they do, someone will try to make them look bad.

The latest example was a front-page story in The New York Times titled "Banks Encourage Overdrafts, Reaping Profits," in which the writer stressed the high fees that banks earn from covering checks that otherwise would bounce.

Citing the fees of up to $35 for each overdraft and the fact that lower-income people pay most of these charges, the article leaves the impression that banks are out to gouge its depositors instead of serving them. Yet articles like this in the mainstream press typically stress only one side of the story.

Granted, some banks impose exorbitant fees that cost the depositor far more than an overdraft protection feature, but to the people who use these services they are often a godsend. If an important check bounces, it can be costly both in terms of a lost transaction and in impaired credit standing. Having the transaction go through at the cost of a one-time fee is in many cases far better than having the check returned and missing, say, a car or mortgage payment.

Similarly, people who live day-to-day are thankful for payday lenders. Most borrowers, large and small, know that, when the chips are down, the rate means little. It is the availability of credit that saves the day.

So you can understand the resentment felt by some bankers who are being castigated for establishing overdraft protection or partnering with payday lenders. As the saying goes, no good deed goes unpunished.

There are two aspects of these criticisms of overdraft policies that need deeper analysis.

The first is whether banks are villains because they provide the service or because of the rate they charge. I am betting that, if local banks did not offer overdraft protection, they would hear about it from the people in their communities. …

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