This article looks at the way banks exploit customers with NSF and overdraft fees. It contrasts this with the alternative of using emergency payday and proposes that these are in fact cheaper than bank fees. It goes on to show how banks lobby aggressively against the payday industry fearing cuts in there fees. The findings are based on a US study by the federal government and is freely down loadable.



An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The commission is managed by 5 people who constitute a board of directors. They are all appointed by the President and confirmed in the Senate. No more than three can be from he same political party.

In 2006 legislation allowed banks to apply automated overdraft programs - much to the detriment of consumers. This is a system where the bank honors customers obligations using computer rules to determine non-sufficient qualification for overdraft coverage. Data and information were gathered through a survey of a sample of institutions representing 1,171 FDIC-supervised banks, and a separate data request of customer account and transaction-level data from a smaller set of 39 institutions.

FDIC publishes the results of a 2 year study on the banking systems use of overdraft programs. The study found that a typical NSF check can result in overdraft fees and interest in excess of 3,500 percent APR. In addition, the study found that customers in low-income areas (median annual income of less than $30,000) were nearly twice as likely to incur these charges.

The FDIC study reinforces the payday loan industry's position that short-term cash advance loans are significantly less expensive than traditional bank overdraft fees. The study also found that, unlike payday loan companies that offer on-demand products, most banks (75.1 percent) automatically enrolled customers in overdraft programs that carry APRs and other fees far more expensive than the typical cash advance loan.

The FDIC study concluded that a typical bank customer repaying a $20 overdraft in two weeks would incur a $27 overdraft fee (the survey median) at an APR of 3,520 percent. A customer repaying a $60 ATM overdraft in two weeks would incur an APR of 1,173 percent and a customer repaying a $66 check overdraft in two weeks would incur an APR of 1,067 percent. Oddly enough the faster one pays down the overdraft the higher the APR turned out to be.

Some consumer advocacy groups like the CRL are lobbying to ban payday loans. This leaves customers with no option than to pay overdraft fees to the banks. CRL and others recently led the charge to pass HB 545, a law effectively banning payday lending in Ohio . In 2006, Ken Compton, CEO of Advance America, said, "Contrary to the CRL's spin, responsible uses of the payday product provides consumers firm footing to overcome unexpected financial circumstances".

Some key findings;

90 percent of banks surveyed allow NSF transactions to be completed without informing the consumer that funds are insufficient - even though the information is immediately available. Only 8% inform consumers that funds are low before completing the transaction. There is little opportunity to cancel the transaction so avoiding the fee.

Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs.

Almost 9 percent of consumer accounts had at least 10 NSF transactions during a 12-month period. Nearly five percent of customers have 20 or more NSF transactions. Customer accounts with 20 or more NSF transactions were charged $1,610 per year in NSF fees on average.