Usury Datapoint of the Day

The typical overdraft fee these days is in the $35 range. And how much is borrowed when people get an overdraft? The thing is that most of the time the overdraft is inadvertent — which means that the account drops only a tiny bit below zero. In the case of debit-card transactions, the average overdraft is only $17. And as a result, as the chart above shows, if you go overdrawn as a result of a debit card transaction, you’re likely to pay $1.94 in fees for every dollar you borrow.

Other methods of payment have lower fees per dollar, but not much lower: if you go overdrawn as a result of with drawing money at an ATM, you’re likely to pay 78 cents per dollar in borrowings, while if you transfer funds electronically, you’ll pay 98 cents. If you write a check, the number is 73 cents.

This is what the likes of John Hempton are talking about when they say that banks are inherently enormously profitable, and that if we just leave them to their own devices and prevent them from paying dividends, they’re likely to become solvent again sooner rather than later, just by dint of how much money they make day in and day out from their operations.

But the question is: do we actually want to live in a country where banks lose money on stupid loans and make it up by socking the poor with exorbitant fees? (It’s not the rich who generally pay those $35 overdraft fees.) If you look at the entire global banking sector over the history of the modern world, I’m pretty sure that looking at interest income alone, it has lost an enormous amount of money in aggregate. Those losses are paid for, generally, by some combination of government bailouts and increased fees. And that’s just not a model I feel comfortable with. Hempton thinks that banks should be both boring and highly profitable; I think it’s worth asking where those profits are coming from before we start embracing that idea too ardently.

(Source: page 38 of this PDF, via Amanda Clayman)