Overdraft Fees and Bank Fiduciary Responsibility

This discussion came up on another thread so I’d thought I’d chime in.

I’m an analyst covering the banking (super regionals, not money centers) and consumer finance companies. I wanted to convey to people on this site just how financially illiterate most of the people in this country are.

The old saying of “living paycheck to paycheck” literally shouldn’t exist anymore. For a vast majority of the poor/lower middle class it should be “living next paycheck to pay this month expenses.”

The fact is that this there is a huge percentage of our population that banks will not grant a credit card or even a checking account (google Underbanked population).

So while, the majority of the people on this website (young, professional, higher earning folks) would be absolutely disgusted by being charged on Overdraft fees, the fact is that Overdraft fees are a fact of life for most individuals. Personally, my Dad is on the board of a local credit union and they have a huge problem: how do we keep overdraft fees low for our responsible customers (our competitive advantage), but keep them high enough that low income customers don’t actually accept these fees as a cost of having an account (His actual quote “We can’t raise those fucking fees high enough for people to stop doing it”).

Educated and financial savvy people always seem disgusted by Payday lenders. And when looking at it from this perspective, it makes sense: why pay 125% APR when you can get a credit card or LOC?? Well the reason why it works? Its right here….

It’s Tuesday and I get paid Friday but my bill for $100 is due now. If I don’t have the cash I could pay it now and get an NSF for a $40 dollar fee, or I could get a Pay Day Loan for $15 dollars (that’s 100%+ APR, people need to understand how APR works) and avoid that fee. So that's the selling point for payday lenders...pay less in fees. But Also the default rate on PDL’s is about 3.5% so people need to realize this works for the vast majority of the underbanked population.

But all of this points to how our financial system fucks the lower class.....not to make a political point either way. But we the fact is that big banks (like Citi, JPM, or BoA) fuck over these people just like Payday lenders do.

So the point is I think we all need to realize the dichotomy in how we look at Overdraft fees. People on this site look at it as when you made a mistake and your bank fuckedyou over…..but for a larger amount of people (yet collectively less in dollar amount), it is just a fact of life.

 

cool story bro....i paid 45$ bucks for a $10 lunch. $35 went to overdraft fees. It was an awkward situation, I was at a chinese place and ordered food, and waited for them to make my food....I then went to pay for the food with my American Express card...but you know chinese places don't really like taking American Express because of the fees. I could've ran out and not paid for the lunch but instead i did the moral thing and took it up the ass by paying with my Visa debit card which had no money in it ....paying $45 for lunch..... i've spent more money on less useful shit

-
 

A fiduciary is an advocate, generally in a financial capacity. Bank executives' fiduciary responsibility is to the shareholders. They have no fiduciary responsibility to customers with regard to the amount of overdraft fees charged. That's not to say they don't have ethical responsibilities or that certain policies could hinder/help public relations, but there is no fiduciary relationship between bank executives and people who spend more money than what's in their bank account.

I know it's an argument of semantics, but it does kind of matter. If a bank is violating its fiduciary responsibility to its customers by charging overdraft fees then the bank is acting unethically automatically, which is a pretty strong statement to make about the industry at large.

The bank executives actually have a duty to their shareholders; therefore, if they eliminated or reduced overdraft fees they would need to replace lost overdraft fee income with income from another source, which theoretically hurts other customers. If the executives didn't replace this income then they'd be violating their duty to shareholders and should be replaced by the board of directors.

 
Best Response

Two part answer: for your father's dilemma, why not set stepped fees, e.g. first time in a year is $5, second is $10, third time is $25 and beyond that is $50, I don't know how it's regulated, but if you want to avoid the low income issue then you could also have a minimum balance fee, broach $100 and you get hit.

Secondly, pay day loans and pawn brokers are generally paid back quickly so while the APR maybe a few hundred percent, the monthly is usually capped and on a loan of two weeks duration you're seeing a small fraction of it. A lot of it is due to tophe cost to originate it, think about it this way if you make a $100 loan, you've got a $3.5 loss reserve, need to cover overhead, if it takes an employee 15 minutes at ten an hour that's $2.5, figure in rent at the same, back office and management add another buck or two and before you've made a cent it has cost you $9.5. Obviously that's just to sketch out the costs, but it's not cheap on a percentage basis to issue small personal loans.

 
guyfromct:

Secondly, pay day loans and pawn brokers are generally paid back quickly so while the APR maybe a few hundred percent, the monthly is usually capped and on a loan of two weeks duration you're seeing a small fraction of it. A lot of it is due to tophe cost to originate it, think about it this way if you make a $100 loan, you've got a $3.5 loss reserve, need to cover overhead, if it takes an employee 15 minutes at ten an hour that's $2.5, figure in rent at the same, back office and management add another buck or two and before you've made a cent it has cost you $9.5. Obviously that's just to sketch out the costs, but it's not cheap on a percentage basis to issue small personal loans.

^This is spot on. Does anybody have an idea who uses payday loans? My mom works in a payday loan call center and says she has seen multiple doctors/lawyers and other high-earning individuals (e.g., >8-10k/month). Drug addictions/gambling possibly?

Also, it's interesting the OP mentioned "Also the default rate on PDL’s is about 3.5% so people need to realize this works for the vast majority of the underbanked population." That seems extremely low. I know a lot of people just continualy roll over their payday loans, so I'm not sure if that 3.5% includes rollovers.

I'm too drunk to taste this chicken -Late great Col. Sanders
 

For professionals who use them it's more likely a lack of liquidity, as well as pay instability. A lot of partners are on a draw and that can be variable. What's surprising is that they don't avail themselves to credit cards or even secured loans which can be much cheaper. I suspect more often than not a lot of professionals play keeping up with the joneses and it costs to play. The reason defaults tend to be low is in a classic payday situation, you have someone with a steady job who pays with a post dated check, so next pay day, you see the cash first. There are some people who do rollover as well. That's purely an anecdotal number from a friend in the pawn business, so don't take it as gospel.

 
guyfromct:

]Secondly, pay day loans and pawn brokers are generally paid back quickly so while the APR maybe a few hundred percent, the monthly is usually capped and on a loan of two weeks duration you're seeing a small fraction of it. A lot of it is due to tophe cost to originate it, think about it this way if you make a $100 loan, you've got a $3.5 loss reserve, need to cover overhead, if it takes an employee 15 minutes at ten an hour that's $2.5, figure in rent at the same, back office and management add another buck or two and before you've made a cent it has cost you $9.5. Obviously that's just to sketch out the costs, but it's not cheap on a percentage basis to issue small personal loans.

That's the exact point I was trying to make, but there has been a large lobbying effort, mostly by large banks, to close these places down. I was just trying to make a point why over draft fees are what they are...and a larger point on how different the financial system is for most people in our country.

 

There was a time I had to use a payday loan but I had an emergency where had to momentarily maxed out my CC and then had to do a bit more so took the total $145 future fee to afford my current liability.

It comes down to the fact many people don't have good enough credit for a CC or temp personal loan but pay day lenders will give out temporary $800 credit without too much checking.

"It is better to have a friendship based on business, than a business based on friendship." - Rockefeller. "Live fast, die hard. Leave a good looking body." - Navy SEAL
 

Eius consequuntur modi id nostrum. Dolor reiciendis commodi vel aut nemo quisquam mollitia. Velit hic autem perferendis ducimus dicta. Unde voluptatum voluptatibus nihil officiis ut laudantium unde. Dicta consectetur consectetur reiciendis unde eum rerum. Quod expedita fugit sunt ut explicabo. Illum repudiandae quo nostrum porro voluptatem.

Blanditiis fuga velit tenetur eligendi ut excepturi voluptates. Aut eos eos nam consequatur. Nesciunt nihil quibusdam cumque neque et et.

Omnis iusto praesentium corporis tempore qui. Illum repellendus minima ipsam odit sapiente est voluptas.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (85) $262
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (65) $168
  • 1st Year Analyst (198) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”