New Regulations Aim to Curb Credit Card and Overdraft Fees - Is this Right?

Congress is regulating away tens of billions in bank profits from "deceptive" credit card and overdraft practices. To compensate, banks are looking at new fees. Is this fair? Many consumers feel that banks are making enough of a profit and should stop with the less upfront ways of making money.

In February, the February Credit Card Act of 2009 goes into effect, clamping down on credit card rate increases, forcing banks to notify customers of changes in the terms and conditions, and changing the way payments are credited. Credit card companies collected $29 billion in fees in 2008.

In addition, starting in 2010, the government is cracking down on how banks charge for overdrawn accounts and overdraft fees. Banks will be forced to allow customers to opt-out of overdraft protection when using a debit card ot ATM. That means that if a transaction brings your balance below $0, the transaction will bounce instead of incurring an overdraft fee and being covered. The Fed estimates that banks generate $25 billion to $38 billion a year in overdraft fees.

In response, banks are looking for othe ways to generate revenue. According to a Wall Street Journal article, banks are looking to promote greater debit card usage (which is more profitable for banks), new types of fee-based checking accounts, and increase fees on safety deposit boxes, stop-checks, etc. This shift seems reasonable. These are all fees which are transparent and in which the consumer can determine if they want the service or not.

So, is this right? Should the government be regulating the banks and forcing them to change their business practices? Some will argue that it's everyone's responsibility to understand the credit card statement and to balance their checkbook so that they don't incur an overdraft fee. Personal responsibility. But to me, that's a specious argument. It assumes that  consumers have the necessary information to make wise choices and effectively manage their money.

Let's consider credit cards. Credit card companies in the past applied payments to the lowest interest rate balance first in order to preserve higher interest rate balances. In my opinion, consumers should be able to choose which balance they pay off first. The same is true of overdrawn accounts. I think consumers should have the option of declining overdraft protection and the potential of having a transaction denied or bouncing a check. That to me is free will and personal responbility.

Those that argue about government involvement in the banking system are putting the banks' rights above the consumers'. Economics has shown time and time again that markets do not operate efficiently. Without some kind of intervention (usually government) corporations will assume monopoly positions vis-a-vis competitors as well as customers that result in inefficient outcomes. 

As far as I'm concerned, the $50 billion saved from overdraft fees, tricky credit card fees, and other hidden charges is money that can be better invested in more productive pursuits.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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