By Christian Mullins
I had never thought much of privilege pay overdraft protection, or courtesy pay, or whatever fancy name a bank or credit union uses to describe allowing an account to go negative, paying the item (a check, an electronic payment, etc) and charging $18-$36 for it. It isn’t that I didn’t think about it; it’s that I didn’t think highly of it. It seemed like a disingenuous way of making easy money off of those that were either irresponsible or just plain bad at math, all while saying, “we’re doing this for your convenience”. Apparently, I wasn’t the only one who thought this way.
It turns out the Arkansans for Responsible Payday Lending and Center for Responsible Lending (that’s two organizations, not one) don’t think much of it either. They’re lobbying for the Federal Reserve to consider those fees as interest, subjecting it to the same limits payday lenders now face. While I think it’s a bit of a stretch consider those fees as interest, financial institutions have deftly found a way to increase their revenue by telling their customers and members that it’s alright for them to ‘bounce’ checks and charges, because we’ll let your account go negative for a fee, as long as you bring your account positive within a reasonable amount of time.
Some people may feel that this is unethical, but it isn’t. It is, however, enabling those same individuals that were likely to use a payday lender to let their account go negative instead. After all, not only is their FI ‘looking out’ for them, but they’re spared the indignity of going in and out of a payday lender.
Is this predatory lending? Not in the strictest sense, but it’s long been known in financial circles that instituting this program would result in much higher overall fee revenue. And in certain circumstances, it can be more profitable than payday lending. Check/debit card purchases are becoming more prevalent, and $10.00 purchases on the card are now the norm. If someone incurs three charges on their account over three $10 purchases, they’re likely facing at least $50 in fees, and a $50 return on a $30 short term investment is something payday lenders could only dream of.
Proponents of privilege pay would argue that charging a fee and paying the item is preferable to simply charging the fee, and I would tend to agree to a point. For those individuals who simply made a mathematical error in their checkbook, privilege pay is the preferred solution. But many (probably too many) individuals are using checking privilege programs as part of their budget, and they’re either unable or unwilling to make the necessary changes to get out of their financial bind. And that’s where consumer advocacy groups take issue.
The ultimate blame falls on the individual customer or member, and that should be remembered. After all, they were the ones who overdrew their account, not their financial institution. But if there’s one truth that’s been proven time and time again, it’s that individuals must sometimes be saved from themselves. Two recent examples are sub-prime mortgages and payday lending. With each of those coming under regulatory control, privilege pay finds itself as the next public outcry. Or to put it another way, privilege pay is the trans fats to payday lending’s second hand smoke.
My advice to any small bank or credit union that offers privilege pay is this: If it looks like it’ll be restricted in any way, adjust your policy ahead of the curve. Large banks can and have weathered decades of bad press, but it isn’t as easy for credit unions. It’s hard to be an ‘alternative to banking’ when your services are being dragged through the same mud as theirs.
July 21, 2008 at 8:42 am
Good, thoughtful post - thanks. While I no longer work at a credit union, when I did, I had an uneasy feeling about our courtesy pay program for much the same reasons as you’ve articulated above more clearly than I would have. I agree with your prescription as well - if it looks as though there’s negative regulatory interest brewing, address the issue upfront, not after the bad press has already hit.