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The Consumer Protection Masquerade

POV By Gabrielle Sheshunoff Bekink on 10/27/2009

Imagine this.  Dick and Jane drop the kids off at the neighbors and go to dinner at a local restaurant, but when the check comes and they present their debit card for payment, it is declined. Their checkbook is no help; it draws on that same account – insufficient funds. Since they can’t pay for a meal they’ve just eaten, are they washing dishes in the kitchen instead? How many dish washers can fit comfortably in the kitchen, because Dick and Jane aren’t the only ones in this predicament? Imagine a similar scene at the local grocery store, at the dry cleaners and at the doctor’s office. If only Dick and Jane had overdraft coverage – but their bank stopped offering it.

Senate Banking Committee Chairman Chris Dodd has proposed a “FAIR Overdraft Coverage Act of 2009” that claims to protect consumers from allegedly abusive overdraft practices. FAIR seems foul to me. Instead of protecting consumers, the bill would have the effect of damaging consumers, hamstringing our economy, and causing great harm to the survival of a still reeling banking industry.

Why would financial institutions want to even bother covering overdrafts at all any more? Dodd’s bill puts a limit on how many overdraft fees you can charge – no more than one a month- and no more than 6 a year and would limit bank charges to those determined to be reasonable and proportional to the cost of processing the overdraft. What happens when bankers just say no?  No overdraft coverage provided period.

Consumers appreciate having overdraft coverage there for them. This service has been around since 1915, peaked in popularity around 1977, and has been offered ever since. Most bankers hear good things from their customers about overdraft coverage, about how the service saved them from the embarrassment, and substantial costs of a bounced check or a declined debit transaction. Dodd’s bill would merely replace the overdraft coverage fee with a returned check fee charged by the merchant and the NSF fee charged by the financial institution – without the convenience to the consumer of covering the overdraft. When given the option to cover an overdraft, the vast majority of customers opt for it. Consumers clearly want the option of overdraft coverage.

So if the Dodd bill forces banks to conclude it makes no financial sense to cover overdrafts, then don’t we end up where we were in the 1950s? Won’t banks again have to charge for services that are now free? If banks charge $20 a month for checking accounts to cover their service costs, aren’t we then saying to most checking account holders – 80% of whom have $2500 or less in their accounts – that they now have to start paying $240 a year for the privilege of having an account? Which leads us to another anti-consumer result: if overdraft fees go away, then banks can no longer pay for other account services that are free today, like online banking, bill pay services, and ATM services, to name just a few. 

Getting back to Dick and Jane, let’s imagine them behaving differently. They are fastidious about tracking their debit card/checking account balance, live within a budget they can afford, and generally would never find themselves washing dishes in a restaurant’s kitchen. If they decide to take advantage of overdraft coverage, they accept responsibility for the fees they incur. As the old primers went: see Dick, see Jane. It’s about personal responsibility for Dick and Jane.

But overdraft coverage and a number of services that consumers think of as “free” could go the way of the dinosaur if we don’t convince the Senator from Connecticut and his co-sponsors and supporters in Congress – that his bill will not help anyone, especially consumers.