How Big Banks Still Make Big Money

An Analysis of How Banks Use Overdraft Fees to Still Remain Profitable

Given the poor state of our current economy in America, due to the foreclosure crisis and big bank bailouts and/or closures, many people may be wondering how banks have continued to make profits over the past few years. Banks have been able to do this by adjusting their business model to profit more than ever before, from the billions of dollars they collect annually from customers in overdraft, NSF and negative account balance fees.

According to an article in USA Today, published on July 12, 2007, "So says a new report from the Center for Responsible Lending, a consumer advocacy group. Its research shows that customers are paying $17.5 billion annually in fees for overdrawing their bank accounts, up 70% from the $10.3 billion they paid in 2004, the first time the center collected this data. The fees - assessed when banks pay for, rather than deny an overdraft - exceed the $15.8 billion that consumers are overdrawing." It is safe to assume that their profit margin has continued to rise into 2010, because banks are continually making it easier for consumers to overdraw their accounts.

According to the same USA Today article here are some examples of how banks are making it easy for consumers to pay more in overdraft fees:

"A growing number of banks are reversing their policies to deny debit card transactions when you don't have enough money in your account. Instead, they're approving these transactions and then charging you for each overdraft, the Center for Responsible Lending found. Nearly half of all overdrafts come from debit card transactions or ATM withdrawals, often for small amounts, the center says."

"Banks are increasingly clearing checks from highest to lowest dollar amount, causing consumers to overdraw more often - and to be hit with a higher total of fees, the consumer's group found."

"If you have $100 in your account, for example, and you write three checks, for $15, $20 and $90, banks would clear the largest one first. You'd then be hit with two fees, rather than just the one you'd face if the bank had cleared checks from lowest to highest amount."

Recently the federal government has been cracking down on fees associated with over drafting accounts; however, most of the new rules will not take effect until summer of 2010, and don't stop theses fees imposed by banking institutions, they just require that the customer opt-in, in order for a bank to be able to charge them a fee. If people choose to NOT opt-in for these fees, they can still use their same bank account and debit card, but transactions will not go through, even if it's only a penny over what is available in their account. This may result in unpaid bills or late fees imposed by other institutions, if you do not keep a current and accurate balance of your transactions.

As a more serious consequence for people that DO NOT opt-in to overdraft fees and continue make payments or purchases that get denied by their bank, due to insufficient funds, may have their bank account closed by the request of the banking institution and/or become blacklisted from opening another bank account . This is because banks utilize Chex Systems, a consumer reporting agency, which tracks all of your negative banking history at traditional financial institutions. If you do not pass a Chex Systems when applying for a new savings or checking account, you may be denied opening up a bank account anywhere in the United States for up to five years.

Due to this many consumers, 48 million to be exact, have chosen to not be affiliated with any mainstream bank and are choosing to utilize prepaid debit cards instead. With prepaid debit cards you DO NOT have to have a current bank account and are not subjected to passing any credit or Chex Systems checks. Anyone, usually 14 years of age and up, can be approved for a prepaid debit card no matter their banking or credit history. Prepaid debit cards already DO NOT allow people to spend over their preloaded available funds, therefore, never charge overdraft or negative account balance fees. prepaid debit cards can also accept direct deposits from any employer and allow people to track their purchases and balances for free online.

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