Biden Administration takes aim at overdraft protection

Editor’s note: This column ran in the Jan. 25 edition of The Pulse, a weekly BankBeat email sent to subscribers which also includes top stories from the previous week. 

My neighborhood coffee shop adds a 5 percent health and wellness fee to all purchases to offset the cost of providing health insurance to its employees. A restaurant I visited last year imposed a 22 percent service charge to “guarantee a fair and equitable wage to all employees.” And, just about every small business I now visit imposes a fee in excess of 3 percent to process payments by credit card. 

While I’m not happy about paying more for something than I did, say, in 2018, I respect every business owner’s right to price their products (or surcharge them) in order to keep their doors open and their enterprise appropriately staffed. If I get really unhappy about all these added fees, or decide I cannot afford the higher price, I will voice a complaint, eat elsewhere, or brew my coffee at home. 

This is the beauty of the free enterprise system: I get to decide when the price of something is too much to bear; I get to seek an alternative solution; I will speak up when I believe a fee is unwarranted or excessive; and, I will pay a fee without hesitation if I believe it exists to provide value, even when that value isn’t delivered to me.  

Now, here comes a proposed new rule from the CFPB that requires the nation’s largest banks to calculate and disclose an annual percentage rate on each overdraft fee, or charge a benchmark fee that recovers only their costs, estimated to be something between $3 and $14. It is the latest in a series of changes to overdraft protection designed to protect consumers from what CFPB Director Rohit Chopra disparages as “junk” fees. 

If you work at a bank with fewer than $10 billion in assets, the proposed rule doesn’t apply. That doesn’t mean its implementation won’t affect you. In fact, it should worry you, far beyond the angst that the CFPB’s next few steps are down a slippery slope.

Price fixing by the government – and that is what this is – is not new. The appeal of price controls is understandable because it always holds out the promise of helping those who most need help. What’s en vogue for pricing interference these days? Rent control and the squeeze on big pharma. But price controls don’t work as they often lead to shortages or rationing. Call it Unintended Consequences.

Consider what the CFPB’s proposed rule asks banks with more than $10 billion in assets (not exactly monolithic institutions, I must add) to do to keep its overdraft protection programs in place for customers. It must either take on complex compliance burdens to justify its pricing strategies, or give its product away. A more likely scenario is that banks will stop offering overdraft protection entirely, which will limit a consumer’s access to badly needed short-term credit. Never mind that many consumers find value in having access to overdraft protection, or understand that convenience sometimes comes with added fees and want that convenience to continue.

Higher prices are on everyone’s minds, especially the people who make pricing decisions at airlines, retailers, food manufacturers, and yes, banks. Companies in nearly every business sector are maintaining or expanding profit margins due to post-pandemic pricing strategies. That’s good news for the economy, bad news for an Administration that needs to win the “Are you better off today than four years ago?” argument in an election year. But that’s no justification for interfering on pricing in a business where there’s plenty of competition in place to keep things in check. 

Banks are not monopolies, and consumers have more choice than ever (challenger banks, fintechs, credit unions) when it comes to deciding where to bank and what fees they are willing to accept, or not. Bankers are reasonable people, and they are willing to explain their services in detail so consumers understand them. Bankers invest in financial education and can provide people resources if they need additional assistance. They’ll also likely reverse a fee when asked, especially if the person has a long term relationship with their bank.

Recall that restaurant that added a 22 percent service fee to offset employee wages? It dumped the fee after customers pushed back. That’s the free market working as intended. I’m sure their menu prices rose as a result, but at least they were free to make their pricing decisions without the heavy hand of government getting in their way.