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If I were a bank, here’s how I’d deal with overdraft fees

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Overdraft fees make me want to cover myself in bird seed and stand in front of a toucan cage while duct-taped to the ground. One overdraft fee at your neighborhood Wells Fargo zeroes out your interest for the entire year, and makes you hate your bank even more than you already do. Is that even possible?

Anyway, here’s an interesting article on overdrafts–and then my recommendation for what I would do if I ran a bank.

Beginning several years ago — no one really knows when — banks slowly got into the business of granting short-term, high interest loans to consumers when they attempt to overdraw their accounts. Account holders are automatically enrolled in the programs, which are now standard at nearly all banks.

Why are the programs, which many people have never heard of, so popular? Financial institutions that adopt them can expect a huge spike in overdraft revenue — a spike of 200 to 400 percent, according to the Center for Responsible Lending.

Financial institutions collected some $10 billion in 2005 through what’s sometimes called automatic overdraft protection…

These mini-loans are incredibly expensive. Most debit purchases that force overdraft loans to kick in are for small purchases, the agency says. The median overdraft loan for a point-of-sale transaction is $14.75. The average fee is more than double that amount. And since most consumers pay these loans back within three to five days, the annual percentage rate on a courtesy overdraft loan can be as high as 20,000 percent.

Here’s what I’d do if I ran a bank
First, let me acknowledge that it’s easy to armchair quarterback, as I know from people saying “you should have done it that way!!!!!” at PBwiki.

In any case, I think this recommendation would actually benefit banks more in the long term.

First, if one of my customers overdrafted, I would charge them the regular overdraft fee–but I would notify them that if they enrolled in a personal-finance class, the bank would waive the overdraft fee, and one more (make customers think positively about the future). The classes would be conveniently held at every branch on various weekends and evenings, and would explain basic concepts of personal finance. At the beginning of the class, I’d ask each customer to fill out a detailed survey of their financial needs. During the class, there wouldn’t be a transparent sales pitch, but the presenter could mention the services offered by the bank.

Then, two weeks after the class, I’d contact the class attendees and offer to help them achieve their goals based on the information they filled out on the survey. Maybe they need a money-market account? Or investment assistance? I’d monitor engagement and try to upsell them on something appropriate for their personal situation.

And that’s it–simple on the surface, but understandably very difficult to implement, test, and measure.

Banks: You’ll reduce the immediate, short-term fees you get from overdrafts–the ones that cause your customers to hate you–but you’ll make them happy by educating them and addressing their personal needs. And because you’re offering to waive their fees and educate them for free, you’re going to build an incredibly loyal base of people who will want to stay your customer. Yes, you’ll lose fees up front. But sophisticated customers buy more services from trusted sources, so if you make it up through other services and help your customers achieve their goals, that’s a win-win.

Related: Here’s how I negotiated out of bank fees

Banks or credit unions who want to know the true depth of my readers’ hatred for overdraft fees can contact me.

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47 Comments on "If I were a bank, here’s how I’d deal with overdraft fees"

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ty
ty
9 years 7 months ago

I don’t know that I agree with this. At a bank, approximately 50% of all income is from fees. Voluntarily taking those away is not a good business practice for the bank.

It sounds nice that you’d be able to cross-sell those customers with other products to enhance their relationship, but it’s better for the bank in terms of income to let those people stay in their free checking with an average balance of $.50 and one OD per month.

Yours sounds nice in theory, but from my banking knowledge, it wouldn’t work.

James
James
9 years 7 months ago

There’s only one problem…I’m not so sure the general population (and perhaps the subset that causes most overdraft fees) WANT to be educated.

And a class taking people’s “precious” evening and weekend time? I think the fees might have to be raised even higher before people would think that was a good alternative.

Just my take on things…

Kent DeCesare
9 years 7 months ago
Ramit — nice post, but I believe that banks make money off the naievity of their customers. The bank has little incentive to educate it’s consumers because most consumers think the bank is helping them out of a terrible mess by extending overdraft protection. Yes, we may hate our bank for doing that, but changing banks is a hassle, so consumers either stew in anger, or don’t give the charges a second thought. I just think that as horrible as it sounds, banks are not interested in educating consumers as much as they are interested in taking advantage of what… Read more »
Wil
9 years 7 months ago
This would be a great service, but as many others have pointed out, not really something financial institutions are interested in. The problem is much bigger and deeper. Consumers are taught that these fees are an annoyance, rather than being taught how to avoid them. There are several things that we each can do to make sure the banks never get the opportunity to charge these fees. It starts with people getting a healthy view of money and personal finance. *Kent* Switching banks is really less of a hassle than the banks would like you to believe. In fact, many… Read more »
Dave
9 years 7 months ago

First, I got to say I like your idea. Heck if you had a bank, or even a credit union, with policies like that I would join.

There are fundamental differences in philosophy though. In your method you are looking to raise up or improve your customers, and treating them investment. On the other hand, banks consider their customers to be resources, things to be consumed. This also gives an indication of their planning horizon. You’re thinking long term, while they are thinking the biggest/quickest bang.

Serena
Serena
9 years 7 months ago

I can see this being done by a credit union before a bank. In my experience, credit unions are much more in tune with the education message.

Andy
Andy
9 years 7 months ago
Hey I love overdraft charges! Nothing beats the time M&T decided to charge me *11* overdraft fees in one day. I was out of the country for the weekend and using my check card for all of my purchases. Unfortunately, some of my deposits hadn’t cleared in time so I overdrew my account. And since they process your charges from largest to smallest I got an overdraft fee on a bunch of little ($5-10) charges. I ended up incurring 11 overdraft charges each at something like $38. This was during my college days and I seeing that my account was… Read more »
AngelaM
AngelaM
6 years 4 months ago
Andy, I’m completely with you on this one. Somewhat off topic, but does anyone know of a bank that clears deposits in a reasonable amount of time? Every direct deposit I receive doesn’t show up until at least 2 business days after the company giving it posts it. Occasionally, it’s a lot longer. Sometimes, the result is overdraft fees for exactly the reasons Andy mentions above. Direct deposit is supposed to be instant… is it not? Am I missing something? I’ve asked the bank about it repeatedly and they claim to put all direct deposits through immediately after they receive… Read more »
Angela
Angela
9 years 7 months ago

In the UK, the practice of charging high fees (not interest) for overdrafts is under scrutiny by the banking regulators. This has meant that its reasonably common that if you ask the bank they will refund it, no one is sure that the fees stand up in court.

Hawk
Hawk
9 years 7 months ago
I think the problem with offering a class is that just milking money out of people means A) you get money and B) you don’t incur continuing expense. Offering classes means creating the entire infrastructure for the classes while also figuring out a way to milk money out of consumers. For example, look at a company that distributes software. They decide that they’re going to charge you 6 dollars to re-download something you purchased longer than 30 days ago. This doesn’t take much effort on their part, and potentially pays off big if they don’t just alienate all their customers.… Read more »
S
S
9 years 7 months ago
Full disclosure: I work in marketing at a credit union. However, I wouldn’t sell it if I didn’t believe in it here. Even before I started working at a financial institution, I dropped two accounts at different banks because I was not happy with fees and lack of personal service. This is my take — at least in our case, we really do value the relationship with our member, it’s taught from the get-go to our staff from the CEO to the teller line. Ramit’s idea is something I would completely take to our management team and see if we… Read more »
molly
molly
9 years 7 months ago
I used to have a credit union account whose “automatic overdraft protection” was to automatically transfer the money from my savings account to my checking account if possible. If I didn’t have enough in savings, of course, I would be charged the $35 overdraft fee. Pretty nice. Sadly, that service went away, but it was one of the things that kept me on as a loyal customer for years after I moved away from the credit union’s locale. Then they started charging me a “dormant account fee” of $5 a quarter, and my loyalty completely dried up and I closed… Read more »
Alex Gierus
9 years 7 months ago
Here’s why banks don’t implement your idea: Because everyone needs a bank. They can charge you overdraft, or convenience fees, or provide morons for you to deal with because you can’t put money under the bed and you can’t buy gas with a handwritten IOU. If they educated the average person they would lose practically all their retail income. As you get more sophisticated (on your own) and realize that you are being ripped off then they provide you with the next level of slightly smaller rip-off. Examples: Level 1: Bogus service charges like overdraft protection or ATM convenience fees… Read more »
Toby
Toby
9 years 7 months ago
I’m with James on this one. I believe the majority of serial-overdraft offenders just accept it as a cost of doing business (just like payday loans and pawn shops). It’s not about balancing the checkbook, it’s about constantly bottoming-out their checking account before their next paycheck arrives. They think, “I need these groceries (or gas, car repair, plasma tv, etc.) now and the overdraft fee is only $20. I can afford that (or I have no choice but to pay it).” Hell, I know people who can’t even have a normal checking account at any local banks because they owe… Read more »
Andrea
Andrea
9 years 7 months ago

Sorry, I don’t make any money and so sometimes have to rob Peter to pay Paul. Overdrafting is sometimes inevitable thing in life. I don’t want to feel further insulted to attend a “class”. I think most of your advice Ramit, is good, but sometimes you sound a bit naive about how life can take it’s twists and turns, especially if you aren’t born rich.

Dustin
9 years 7 months ago

My impression is that this will be annoying to customers too. Would you want to give up your Saturday because of that $15. I think this would only work if it was an industry standard. People know if they are the overdraft type and thus go to banks with overdraft protection.

Willie
Willie
9 years 7 months ago

First time reader here — loving your site and will continue to read it!

Your idea is great! But as some other readers pointed out, not everyone appreciates being educated. Probably because many people are not financially educated to begin with (I know I wasn’t… until I saw my 5th OD fee).

The idea will likely benefit a minority of bank account holders (sad, I know).

John
John
9 years 7 months ago
my experience on the other side makes me less inclined to be sensitive to those that overdraft. it’s the whole “fool me once, fool me twice” game. i have never had a problem getting a “first occurrence” fee dropped & have never stood in the way of those seeking the same. we all make mistakes. but come on. threatening to pull your business because they won’t reverse your 15th overdraft? go ahead. guaranteed you’re listed on chexsystems for account abuse before you even walk out of the door. banks are full of repeat offenders that would rather gamble on available… Read more »
Raj
Raj
9 years 7 months ago

I think this is a great idea. Despite the money a banking institution generates in overdraft fees, customer satisfaction does have value and revenue potential.

Don’t want to eat up your Saturday by going class? Make the class online. This will allow flexiblity and greater outreach. You have online banking, what about online banking classes.

Andrea
Andrea
9 years 7 months ago
John writes: ~80% of overdraft fees are incurred by the same 5% of bank customers. these customers normally are living paycheck to paycheck, have little or no money set aside for retirement, money markets, or other bank products, & commonly prefer not to devote a whole lot of time to personal finance. This above would be me. I guess I’m the repeat offender. I know how to balance my checkbook, that’s not my problem. My problem is making more money. John makes a good point about the classes being marketed to a small percentage of people. John, however, is the… Read more »
Mike
Mike
9 years 7 months ago
Andrea writes: “My problem is making more money.” and, “I don’t want to feel further insulted to attend a class.” I think that’s John’s point. Not knowing John personally, I can’t vouch for whether he equates limited finances with moral failure, but your comments here completely reinforce John’s statements. The 5% of repeat offenders are probably those who think that “making more money” is the answer… when the answer is more likely “living within one’s means, no matter how limited”. When I was a poor student, I avoided OD fees by paying for necessities occasionally with the credit card and… Read more »
Nathan
9 years 7 months ago

I just switched to US Bank. They offer an overdraft protection plan in which funds are automatically taken from a line of credit at the bank when you are overdrawn (at $200 increments). The interest rate is high (around 20%) but if you put money back in your account right away you are paying pennies in interest instead of a flat fee.

missiondebtfreedom
9 years 7 months ago

I’m mortified if I overdraw a checking account. This recently happened to me after my kids school held a check for five months before sending through. I was floating to close to $0.00 two days before payday and got hit with the $28.50 check to the school – plus an overdraft fee! Despite my attempts to grovel, the bank refused to remove the fee.

john
john
9 years 7 months ago
A friend got married. His wife’s church required they attend some pre-marriage class. One of the topics was finances. Attendees were asked if a credit card was a good thing to have for emergencies. Everyone in the class raised their hands in agreement except for my friend and his new wife. When I opened my last chequing account I was told my credit rating was “so good” they would give me overdraft protection. I said “no thanks”. The lady was confused. I said “I won’t ever use it.” She said “what about if you don’t remember and your account balance… Read more »
Jennifer Lynn
9 years 7 months ago

Alot of information here I wasn’t aware of. Why do I find this discussion so horribly depressing?

=^..^=

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[…] Ramit tells us what he would do if He Were a Bank […]

Joshua Keezer
Joshua Keezer
9 years 7 months ago
I don’t have much time to make this post because I’m at work, at a bank. And because of a certain policy in place, I can’t say much about which bank I’m employeed by. It isn’t a glamourous policy either. I hate it. I deal with overdrafts everyday. Some people call in with legitimate concerns and complaints that I have to decline. Some people call in with no excuse and expect the money to be given to them. I have to treat everyone that calls the exact same. I do hate my job. I don’t feel like I have no… Read more »
Jennifer Lynn
9 years 7 months ago

Aww, Josh, hang in there, hon. Thanks for the useful advice. It’s always beneficial to get an insider’s viewpoint. Continue to educate consumers, and I’m sure you’ll land a much more fulfilling job very soon.

Willie
Willie
9 years 7 months ago

@ Josh:

Thanks for sharing. Good luck on your search. I am sure you’re heading in the right direction with that kind of thinking. You can never have enough soul 🙂

Kibrika
Kibrika
9 years 7 months ago

I’m sorry I’m too sleepy to read all the comments. I think it’s a good plan, because I’ve got the impression, that businesses which are careful towards the client and in which the workers are satisfied and love their job, tend to be more successful.

Andrea
Andrea
9 years 7 months ago

To Mike:

I was a spewing a bit of anger because this overdraft happened to me just this week. I understand your point. My issues stem from mostly from a job loss that put me in a financial tailspin (which I’m in the midst of recovering from).

moom
9 years 7 months ago

I’d find the offer of the education thing rather insulting… Once I ended up with one of these fees while travelling and getting confused how much money was in my account.

Back in 1983 when I opened my first bank account in the UK an overdraft facility was built in. Sure they charged interest but there was no such thing as “bouncing a check”. The US banking system seemed rather backward when I first came here in 1990. They sent yoru checks back to you in the mail?!

Sri
Sri
9 years 7 months ago

If you are a GOOD valued customer, they usually take care of overdrafts. and ur checks will never bounce.

Carter Adler
9 years 7 months ago

Higher overdraft fees mean that banks earn a lower percentage of their income on the interest spread, and so are less dependant on the interest decisions of the Federal Reserve Board. Interestingly, rather than reduce earnings volatility, this has been shown to increase volatility for the banks! The Federal Reserve and the FDIC have conducted several interesting studies on this issue.

Andy
Andy
9 years 7 months ago
Well I read through some of the responses, but not all so I may be repeating some… This is certainly an idealistic and impractical solution. Banks would never implement this because it attacks a revenue source and certainly not because there is a service called overdraft protection that any customer can apply for and pay an annual charge of $25 per year. You will pay interest on your overdrafts ~18% but you won’t get charged per overdraft and this will save you tons of money in the long term if you frequently overdraft. The problem is people do not read… Read more »
Fred
Fred
9 years 7 months ago

I think the interest on the overdrafts you mentioned are not accurate. I saw different national averages on bankrate.com and http://www.WallStreetQuest.com

Rob Rubin
9 years 7 months ago
I agree with how you feel about overdraft fees. I think we should help wean banks off of PUNITIVE fees. How (I cut and pasted this from my blog)? 1. Avoid doing anything that might incur a fee; 2. Pay attention your bank statements to find fees; 3. Call and complain — try to get fees waived (remember, the squeaky wheel gets the grease); 4. Switch banks if your’s sucks. I’m working on a post that summarizes all the different fees banks charge and how to avoid them. Ramit, keep up the good work.
Dave
Dave
9 years 7 months ago
Having had a lot of difficult times, I regularly incurred the dreaded $35 overdraft fee on my Wachovia account. I tend to use my debit card for everything from paying utilities to buying a quick meal, so it was disheartening to see a #5 at taco bell cost forty bucks a pop. Even worse would be 5-6 transactions that get applied before a paycheck clears (I’m convinced this is a conspiracy by the banks), each costing $35. I’d be out several hundred dollars, on occasion. Here’s what I did to hack the process: – Every paycheck, I pay all the… Read more »
Eric
Eric
9 years 7 months ago

I like overdraft fees…people that pay them cover the costs of my free account with lots of perks, free checks, credit card rewards, etc.

There’s a difference too between overdraft fees and a line of credit that is drawn down when you go below $0.00. I use this every once in a while when there is a difference of a day or two between bills and paychecks. I’ve never paid more than 50-60 cents for a few hundred bucks borrowed for a few days and paid right back.

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[…] If I were a bank, here’s how I’d deal with overdraft fees […]

Lora
Lora
9 years 3 months ago
Here is the way Wachovia has ruined my life; both financially and personally, with its overdraff fees and policies. I noticed a couple of weeks ago on my online statement that Wachovia had charged me $950 in overdraff fees for under $200 in overdrafts from my checking account from the beginning of this month; leaving my checking account depleted in $1,128. My paycheck that I have directly deposited into my checking account back on 6/15 covered this; however, leaving me with a plus sum of only $22.00. During May, Wachovia had charged me $250 in overdraft fees for $50-75 in… Read more »
Crystal
Crystal
9 years 2 months ago
I hate overdraft fees myself! When I had forgotten about a check wandering around in space for over a month…it hit my account when I wasn’t expecting it…and yes, you guessed it…overdraft fees. Except the bank didn’t charge just one overdraft fee…the one for the check. Oh no…it cleared the check…and charged overdraft fees for the other 6 little charges I had put on my debit card. One soda cost me 36 dollars in fees. I called the bank to try to have them waived…even talked to the branch manager, and they refused. So I cancelled my overdraft protection. What… Read more »
Marc
Marc
8 years 5 months ago

Overdraft Fees! Banks make billions on this. I can get a better deal from my loan shark. I hate it I hate those BLOOD SUCKING bankers that invented it.

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[…] is often an administrative error and start getting angry at being exploited.  Ramit Sethi has a post on the topic that is illustrative of common sense – read the first comment in response to […]

Sean Terell
Sean Terell
1 year 3 months ago

There are no date stamp anywhere so I’m not sure if this is an active conversation or not (June 21, 2015)

The assumption is that most people overdraft intentionally is incorrect. Sadly I live paycheck to paycheck, and I often run into overdrafts because of the order of processing and the illusion that there is more money than is actually there because charges you made and believe have cleared are “pending”. Fees need to be scaled…it is insane than I go over by 83 cents and am charged 37 dollars for it.

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