Overdraft fees have been portrayed as a poison that plagues the American consumer. These fees, which are incurred by debit card customers when they exceed their available funds, were made out to be one of banks' worst offenses during Congress' financial regulation battle. The outrageous fees, often exceeding $30 a pop, made up a huge portion of bank revenue, perhaps as much as $38 billion per year, according to one report. But financial reformers in set out to change that. They appear to have failed, however.
The legislation that eventually passed didn't require that banks eliminate the fees altogether. Instead, it just required they provide consumers with a choice. They could either continue to incur hefty fees when trying to make a purchase in excess of their balance, or they could opt out and would be forbidden from making additional purchases when their balance can't support them. In fact, more Americans prefer the fees. David Benoit of the Wall Street Journal reports:
Rather than face the embarrassment of being declined a purchase, 75% of consumers are opting to pay a fee--sometimes as much as $34--each time they overdraw on their debit-card account, according to Moebs Services Inc.
This result paints a rather fascinating portrait of American consumer psychology. There are at least two conclusions to draw here. First, this shows the high value most Americans assign to appearing financially healthy in today's society. They would prefer pay a clearly exorbitant fee rather than endure the embarrassment of not being able to make a purchase. This isn't shocking. Americans are a proud bunch. The "keeping up with the Joneses" paradigm is one that has been thriving for some time. No one wants anyone to know that they can't afford something that they want to buy.
Second, it shows that most Americans aren't that sensitive to financing costs if the fees allow them to buy something they really want. But again, we already knew that. After all, Americans love affair with the credit card began back when credit card companies were under less strict regulation than that with which they must now contend. And when you think about it, overdraft fees are just big one-off financing costs, because the bank is giving you credit beyond the money your checking account contains. If high interest rates and penalties didn't stop Americans from buying more than they could afford before, then why should overdraft fees?
Since none of these psychological traits of the American consumer are particularly surprising, the fact that the vast majority are opting-in to continue to face overdraft fees shouldn't be a shock either. The government can regulate as much as it likes, but it's pretty hard to change consumer behavior when deeply engrained practices have set in. You can't legislate personal fiscal responsibility.
The small 25% decline in customers who face overdraft fees doesn't necessarily mean that banks revenue from these fees will only decline by 25% as well. The rules did force some limits on the nature of the fees. There's also some possibility that the worst offenders are the ones who opted out, so their spending will be more controlled. Yet, that's not so likely. Abusers of consumer credit are likely the precise population that wants to continue to have the option of spending more money than it has, while Americans who are fiscally responsible and savvy about their finances are the ones who would seek to avoid overdraft fees. If that's the case, you'll continue to have most of the same people incurring overdraft fees going forward as before, and most of the same people avoiding them who never paid them in the past.