Overdraft fees, yea or nay? Part 1

It seems that most of America is bent on blaming the banking industry for all failures in our society. Problem there is that they are not responsible for every ill on the face of this green earth. Case in point, the dreaded overdraft fee . To be brutally honest, there is an incredibly easy way NOT to pay an overdraft fee; Don't overdraw your checking account! Stay with me, and snarl at me later...

Depending on your banking institution's policies, you may be charged per item paid into overdraft, or per day overdrawn, or both. I've listed the policies from least mercenary to most mercenary on the part of the financial institution.

America has forgotten this first crucial financial fact: Writing a check, swiping your card, and establishing automatic electronic payments are promissory notes that promise the person you're paying that the funds are in the bank waiting for them to collect their payment. Ever wonder what those neon notices are at cash registers? They're a reminder that your check is a promise of payment for the services or goods that you just purchased.

Believe it or not, there is a legitimate business case for overdraft fees. I vote yea for the least mercenary method: a charge per item overdrawing the account. The business case for OD fees is quite simple: paying an item into overdraft is an extension of unsecured credit on the part of said financial institution. When you don't have the money in the bank to cover your check/debit card transaction/ACH payment and the bank pays it for you, they have loaned you money on your promise to pay that item. Reread that highlighted part for me now. I've rewritten it for you here: they have loaned you money on your promise to pay that item.

Still following me? Good. Let's put this into play, and have one item overdraw my imaginary checking account by ten dollars, and to make the math easy, the overdraft fee is thirty dollars. So I now owe the bank forty dollars?!? Why not just $10? To quote my daughter, it now sucks to be me, or does it? The bank has charged me the equivalent of 300% interest, that I won't argue. But the bank has made good on my promise of payment when it didn't have to.

But let's look at the larger individual picture now, Remember these words from earlier: they have loaned you money on your promise to pay that item? If your check bounces to a business, that is technically fraud, and the business can prosecute you as such. I happen to think that 300% interest on my hypothetical overdraft of ten dollars is a pretty good deal when compared to court costs and possible imprisonment. It's certainly less expensive than a lawyer.

But it's only ten dollars, you say? Multiply that $10 by all of the accounts overdrawn on any given business day, and you've got an absurdly conservative estimate of how much unsecured credit the bank has issued on that day that keeps the Constable off of your collective fanny. Tomorrow we'll take up the rest of the issue.