Banks Paying Customers to Take Overdraft Protection

By James Kwak

I saw a bank ad in the subway yesterday. Basically, it said:

  1. If you set up direct deposit the bank will give you $100.
  2. If you set up overdraft protection the bank will give you $25.
  3. If you activate online bill pay the bank will give you $25.

1 makes sense because (a) it gives the bank more cheap deposits, which are its raw material and (b) it increases your switching costs. 3 makes sense because it increases your switching costs; it may also cause you to give the bank more cheap deposits, since you need money in the account to cover your bills.

2 makes sense because . . . the bank expects to get more than $25 in fees out of the average customer. A single overdraft fee typically costs more than $25. Now people will be making an explicit decision: “I want the $25 now because I don’t think I’ll ever pay an overdraft fee.” (To be fair, they might be thinking, “I already value overdraft protection at $35 per occurrence, so the $25 is just a bonus.” But I doubt many people think overdraft protection is worth $35 per transaction when the typical transaction is a lot less than $35.

There’s nothing illegal about this, and arguably it’s a smart business decision. It just makes things perfectly clear: the banks want those fees so much they are willing to pay you for them.

21 responses to “Banks Paying Customers to Take Overdraft Protection

  1. bungalowbill

    You’re not making a summary of the bloggers’ treasury meeting?

  2. “I want the $25 now because I don’t think I’ll ever pay an overdraft fee.”

    Isn’t it exactly the opposite? “I want the $25 now because I know I will be overdrawing my account and I want to avoid the fee for bouncing a check?”

    Overdraft protection just means your account balance can go negative. The bank makes money here because the interest rate on the overdrawn amount is insanely high. (Or it was… Does the CARD act say anything about these rates? I am going to guess “no”, which would also help explain these offers.)

    So, as with high-interest credit cards with good benefits, people sign up because they think they will pay their balances quickly. The bank offers them because they know many people will not.

  3. 3 should also mean cheaper transaction costs on processing payments (rather than clearing checks), but often doesn’t.

  4. Why don’t they just pay a decent interest rate and I will leave my money with them…

  5. Typically OD Protection refers to linking a credit card or savings account to yor checking account. If an item comes through that would cause your checking account to go negative, the OD Protection would automatically pull from the savings account and deposit it into your checking account to cover the item/s. For this they usually charge a flat $10.00 fee for this. Much cheaper than is you don’t have OD Protection setup and the bank charges you $35.00 per item that causes you to go negative. I think Chase will charge up to three $35.00 fees per day (so if 5 small charges come through in a single day that would cause you to go negative, they cap the OD’s at 3) However I think B of A and WF will charge between 5-8 $35.00 fees in a single day.

    As far as the ad you saw, I’m guessing they just assume when someone sets up OD protection, and knows they have it, they will be less worried about either balancing there account/ keeping track of there balance, and will sooner than later trigger the protection and after 2-3 times the bank will be making money for that account going forward if they use the OD Protection.

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  7. Tony Foresta

    The more efficient and intelligent option would be NOT overdrawing on your checking account. Why reward stupidity.

  8. More marketing. B of A called me to try to sign me up for “Credit Protection,” a ‘service’ that purports to pay my minimum payments for me if I suffer from one of a limited set of setbacks in life. Cost: a mere 1% of outstanding balance — if I pay off in full each month, I don’t pay anything (or so they say).

    I don’t carry a balance on this card (ever, in fact I rarely even use it), but I’m suspicious. I’d like to see the complete term sheet before I decide to sign up for this “service”. Phone rep: “No, I can’t send you the details until you sign up.” Me: “You mean I have to buy it first before I can see what I’m buying?” Phone Rep: “Yes, sir.”

    Real message from B of A: “Forget about pages of tiny-print legalese that obscures the true cost of what we’re selling you. Since you have proven yourself a responsible user of credit, we’re afraid you might actually read it. Instead, we’re going to make you sign up before we even let you see what you are buying, and maybe you won’t get around to canceling before we squeeze some fees out of you.”

  9. I recently received a mailing from Chase offering $50 just to talk to them about overdraft coverage. “To qualify for the bonus you must come into a Chase branch by 3/29/2010 and give your decision to a banker about [overdraft coverage.]”

    Haven’t tried it yet, but it seems clear you don’t actually need to sign up, just tell them yes or no.

  10. Related (in a way):

    http://bit.ly/9lw3FC

  11. If that is truly an ad (sorry, I don’t see any evidence), for those of us who never overdraw, that would be a great deal. That’s basically $150.00 free dollars for those services, and I’m unlikely to need any of them except maybe once or twice just to show that I used it.

    However, banks that pay high interest on checking accounts (like reward checking accounts) will only obtain my business as in the long run, they’ll pay more money.

  12. the gov’t is trying to make it harder for banks to collect these fees so I say more power to them. 99% of people who use overdraft protection are happy with the service. the media only reports on the rare cases of people being charged multiple protection fees in a single day for several small transactions. people need to keep better track of their spending. what happened to the old transaction register/balancing your checkbook? Banks operate in an extremely competitive marketplace. they compete with other banks, credit unions (tax exempt), and other less regulated entities. it’s too bad that they have to come up with new ways to make money but it’s necessary for them to stay well-capitalized. Clearly they aren’t making as much as they should off of their lending when people decide not to pay back loans.

  13. If banks would work as hard and spend as much keeping existing customers as they do attracting new customers life would be better. Actually, this is true of may businesses – AT&T being the poster child.

  14. yes Kwak doesn’t understand overdraft protection. Nemo you have the right argument.

  15. It isn’t really stupidity since the entire payment system is built on easy access. It is much easier to get an overdraft than it is to balance each transaction like people used to with their check register.

    The easiest solution is for banks to get away from their fee based model and take a lesson from companies like ING Direct Electric Orange. With Electric Orange you still get the benefits of easy access but you don’t have to be inconvenienced with keeping a register (which anyone under the age of 65 rarely does). They actually give you a competitive interest rate on your checking account with no fees. They attach a credit line with a variable interest rate (right now around 8%) to the checking account. In the event of an overdraft the credit line is access and you are charged the annualized interest charge which is usually less than fifty cents instead of the exorbitant 500% fees the big banks currently charged. The only catch is that you can’t make in person deposits. I use a credit union for that rare purpose.

    SOLUTION: circumvent the TBTF banks altogether. Vote with your pocket book!!!

  16. It isn’t really stupidity since the entire payment system is built on easy access. It is much easier to get an overdraft than it is to balance each transaction like people used to with their check register.

    The easiest solution is for banks to get away from their fee based model and take a lesson from companies like ING Direct Electric Orange. With Electric Orange you still get the benefits of easy access but you don’t have to be inconvenienced with keeping a register (which anyone under the age of 65 rarely does). They actually give you a competitive interest rate on your checking account with no fees. They attach a credit line with a variable interest rate (right now around 8%) to the checking account. In the event of an overdraft the credit line is access and you are charged the annualized interest charge which is usually less than fifty cents instead of the exorbitant 500% fees the big banks currently charged. The only catch is that you can’t make in person deposits. I use a credit union for that rare purpose.

    SOLUTION: circumvent the TBTF banks altogether. Vote with your pocket book!!!

  17. JR Max Wheel

    There is as pointed out nothing new about banks’ tactics, however since the onset of the crunch banks’ behaviour [at least in the UK] have been anything but
    attractive. Bank charges are up, even the slightest overdraft transgression say 1p or 1cent triggers a charge of £35 + plus interest at penalty rates. They have also drastically curbed lending and continue many objectionable practices- delaying credits made in cash!
    Delays in procesing items on debit cards when this should be an automatic block on funds given the nature of EFTPOS systems. Mortgage lending has passed from behaving like a drunk tossing banknotes down the street to miserly levels excaerbating the housing sector problems. There IS a sensible and profitabe moel of retail banking and not one that depends upon the casino arm of the bank. Customers might be somewaht more understanding if the institutions concerned actually started to pay attention and respond to their customers as people and not digits.
    The system currently is so utterly distorted – savings and investments- poor service and hefty transaction costs, checking and savings accounts, worse service, minimal interest and excessive charges.
    A major re-design is required whic is genuinely both more client centric and realistic about ability to pay. We have had enough bleating/special pleading from Bankers Associations

  18. The service is to allow overdrafts on Debit Cards (primarily), not checks. In the case of the card, without the “protection” you just get your purchase (or ATM withdrawal) denied, not charged for a bad check.

    This is the “gotcha” that the bank is hoping to earn lots of fees on. Kwak understands this (I’m talking to you, “corn”).

  19. Are you so good, well-protected, secure, and immune from health problems, job loss, that stupidity is the ONLY reason you can see for an overdraft occurring to your bank account. “Why not just keep the money in there and not be stupid”. Well, congratulations, You must be among our country’s thoughtless elite. Have a very enjoyable, “cushy” life.

  20. bungalowbill

    That’s truly an ad. It’s for M&T Bank. They advertise in DC’s subway. James Kwak must have seen it on his way to the bloggers’ meeting at the Treasury.

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