Why People Don't Mind Paying $39 for a $4 Latte

Last Updated Mar 8, 2011 5:40 PM EST

So here's news that falls into the wow-that's weird category.

A few months ago, new rules took effect restricting banks' indiscriminate assessment of overdraft fees. Before that, a bank (or other depository institution) could automatically include you in an overdraft protection service which would pay if you overdrew your account but hit you with a fee that ran as high as $35 for each transaction. Folks who didn't closely track their balances often piled up a batch of fees when they overdrew their account by, say, using their debit card to pay for their dry cleaning and then went on to buy a few groceries, get a haircut and indulge in that iconic over-indulgence, the $4 latte. (I say iconic because financial advisers are always telling us that if we put that $4 in a retirement account, instead of spending it on an overpriced drink, it would now be worth $20 million.) Some banks deceitfully added the amount of overdrafting they would allow onto a consumer's checking account balance without telling him the money was fictional. One of my colleagues a few years ago ran up over $300 in fees in one afternoon of doing errands because her balance, when she checked at her bank's ATM, incorporated $500 of pretend money. In addition to collecting the fees, banks charged another $7 to $36 if you didn't repay the overdraft within a few days, according to a 2010 survey by the Consumer Federation of America.

Consumers squawked -- in one survey, 80 percent said they would rather be denied the charge than pay the fee -- and the Fed got to work. So a new rule, which went into effect last summer (July 1 for new accounts and August 15 for existing accounts), requires that banks obtain consumers' permission or "opt in" before enrolling them in the service.

Everybody -- particularly and especially banks, who cried piteously about the billions (about 38 of them) they stood to lose -- believed that consumers would ditch overdraft protection. Instead -- and here's the wow-that's-weird part -- a new survey by Moebs $ervices, an economic research firm in Lake Bluff, Ill., found that three-fourths of American checking-account holders, some 100 million, signed up.

One explanation for this seemingly illogical desire to get nickeled and dimed, says Mike Moebs, company founder, is that "people make mistakes, and they know they make mistakes." Only one in eight Americans balances his checking account and thus has more than a vague notion of how much money is sitting in it. And, as one of the 12.5 percent who do try to keep track, I have to say that my balance almost never agrees with the bank's, no matter how carefully I add and subtract. So to avoid having a transaction at a grocery store or restaurant come to a complete and humiliating halt, people sign up. "They view it not as a penalty, but as a safety net," says Moebs.

For many bank customers, especially those with lousy FICO scores who have perhaps maxxed out their credit cards, overdraft protection is a quick, albeit expensive, way to get a loan. A payday lender charges less, on average about $17.75 per $100, according to Moebs. But to get a payday loan, you have to show proof that you are an earner and that you have a bank account, and the approval process takes a few days. Overdraw with a debit card, and you immediately have access to the goods you want.

I am not so sure that consumers made such a careful assessment of the economics. Banks have not exactly been shy about prodding people to sign up for overdraft protection. According to my CBS Moneywatch colleague Jane Bryant Quinn, banks threatened consumers with having "a debit card refused at the grocery checkout because you're overdrawn by the cost of a $1.50 tin of tuna." Better to put the tuna back on the shelf, she says, than to buy it and get dinged with a hefty bank fee. Chris Serres, investigative reporter with the Minneapolis Star Tribune, in a recent story about overdraft protection, points out that:

TCF Financial Corp., the Wayzata-based regional bank, was particularly aggressive. In addition to sending postcards and e-mail alerts, TCF's tellers pitched overdraft protection as customers walked into a branch or pulled up to a drive-through window. The marketing blitz proved effective. About 90 percent of TCF's new customers enrolled in overdraft protection since the new rules went into effect. About 65 percent of its existing 1.3 million checking-account customers enrolled.
There are less expensive ways to get overdraft protection. For one, you can deposit money in a savings account and have it linked to your checking account. If you overdraw, the bank vacuums money out of savings to cover your debit. The fee for that transaction is now about $5, says Moebs. He also suggests that you use a bank that will text and/or email you if your balance drops below an amount you specify. Then you'll know that you have to be careful. He also recommends that people try smaller banks where fees are more modest. The price of an overdraft at a large, national bank (one with over $50 billion in assets) is $35. At community banks, the average fee is $27 and at credit unions $25.

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