Pigovian Tax on Carelessness
Kevin Drum links to a NY Times article that, mainly through annecdote, seems to be trying to fabricate the "next" consumer crisis, over debit card overdraft fees. The key chart, containing about all the real non-annecdotal data in the article is below:
I wrote in the comments:
Wow, the NY Times almost fooled me with this chart. Yet again they play games with scale and timeframes to make a point that is not correct. For example, it looks like overdraft fees may have risen faster than transactions, but that is because the overdraft fee revenue chart goes back to 1992 and the transaction chart only goes back to 2000.
If we look at both from 2000, we see overdraft fees on debit cards have gone from $20 billion to $38 billion today, or about a 90% increase. At the same time, dollar amount of purchases on debit cards went from $0.3 trillion to $1.3 trillion (as well as I can read the graph) or an increase of 333%. I understand that there may be a mix shift I am missing - the overdraft numbers include charges for checks as well as NSF fees, but the article does not have the changing mix. This is another topic, but why can't reporters even at the Times include all the numbers you really need to analyze this stuff - don't they try to do these calculations? They have graphs side by side, implying one should compare trends, but they have apples (debit card transaction volume) next to oranges (all overdraft charges, including debit cards but other stuff too) on completely different time scales.
Anyway, by the article's own numbers, the overdraft fee volume has grown 3.5 times slower than transactions, meaning that overdraft fees have dropped from 6.7% to 2.9% of debit card transactions. This shift may be less dramatic if there are mix changes in the fees, but never-the-less, why isn't this good news? The world is never going to make the price of carelessness=0, if for no other reason that the moral hazard would be so large. But the high price on carelessness in this case seems to be reducing the frequency of people being careless (if the price of an overdraft has really gone up as implied anecdotally in the story, then the frequency must be way down -- sure missed that data in the article). We want to raise the price of Co2 to produce less of it - why don't we applaud when we raise the price of carelessness and we get less of it?
Zach:
I've figured out how to not get hit with overdraft fees: don't spend more than you have. I've had a checking account since I was 16 (with debit card) and a credit card since I was 22, and I've never paid so much as a penny in interest or fees on any checking or credit card account.
But from the rumblings in Washington and other places, it seems that I chose poorly in being responsible.
September 9, 2009, 10:20 amGreg:
It would be nice to get a chart comparing apples to apples rather than a bowl of mixed fruit.
It would also be nice to see a breakdown of recent debit card adoptions by consumer income level. The statement that 93% of all overdraft charges come from 14% of all customers (who tend to be poorer) is, if true, important. If the increasing transaction volume is coming from new, more moneyed individuals, then that helps to explain why overdraft fees compose a smaller percentage of transactions.
September 9, 2009, 10:22 amJim Collins:
For seveeral years I paid a $7 per month charge for overdraft protection up to $500. Finally I ran short one month and wrote a few checks over what I had in my account. When I checked my balance I found that my bank hit me for $175 in overdraft fees. When I asked about my overdraft protection I was told that the protection was that they paid the checks and didn't send them back to the people I wrote them to. I was still on the hook for the $175. I have a new bank now with a $500 line of credit that kicks in when I need it. One thing to think about. If a merchant has a computer problem and they take the same charge out of your account multiple times, like say 1000 times. Your bank doesn't have to waive the overdraft fees and the merchant is only liable for the amount that they took over the original charge. Guess who gets left holding the bag? This happend a few years ago to a guy in Pittsburgh. AT&T had a computer glitch and debited a man's checking account about 1000 times over a holiday weekend. Only after getting a local TV news program involved did the bank agree to waive the overdraft charges.
September 9, 2009, 11:23 amDKH:
Reading the comments on that thread, there seems to be a lot of "we know better than everyone else" going on. Look, if you don't like the terms of a bank's debit card, don't use that bank. Additional efforts can include encouraging others to use a different bank. Advocating new regulation doesn't seem like the appropriate response to me.
September 9, 2009, 11:30 amMichael:
There is no need for an overdraft to ever occur. Most banks set up debit cards to overdraw the account to $50. You can change this to 0. So if you try to buy something for $15 and have $10 in the account, the transaction is declined and this process does not generate any bank fees.
I use this process to buy online. When I buy something for $150 online, I go to my banks website and transfer the money from one off my accounts to the debit account. This cost me nothing and prevents double billing.
September 9, 2009, 11:59 am