Boing!

As George Carlin might have said, “Boing” is such a friendly word. It shouldn’t be the sound of checks bouncing all over the place, as careless consumers and wanton kiters alike play fast and loose with what’s in the bank. But, there you have it: a dichotomy of cause and effect.

That the air has not been filled with an onomatopoeic symphony caused by rubberized payments is due to the good nature of banks. What prompts the good nature of banks, of course, is fee income and lots of it. About 15 years ago, banks got wise to the idea that they could make a bundle if they didn’t embarrass their customers and return their checks for insufficient funds. Instead, they turned irresponsible consumer behavior into a profit center, charging whopping fees for clearing checks that didn’t have enough money behind them. Customers avoided potential shame, banks made billions. A win-win for everyone!

It was a clever strategy. Unfortunately, clever begets clever. First, “overdraft protection” was tied to pulling money into your checking account from your savings account – meaning you still had to have the money somewhere. Then it became a game of not having the money right now, but getting it into the account pretty fast. And on the banks’ part, it became an endless series of tests to see just how much penury consumers would put up with for this privilege. From continually upping fees, to aggregating them by “clearing” the biggest items first (so that every other smaller item after it would also incur fees for insufficient funds), to providing the “service” to customers who had never asked for it, banks found overdraft protection to be an amazingly lucrative product.

Too lucrative, it turns out. A couple of years ago, as the nation turned against its own financial foundations, consumers and Congress alike rebelled at the egregious nature of this protection racket. New rules came into place forcing banks, theoretically at least, to get their customers to opt in to the service. But there weren’t any rules about how that was supposed to happen. So banks simply asked their customers if they’d like their worthless checks thrown back in their face at the supermarket checkout, or would they prefer the “convenience” of having such a thing handled privately just between them and the bank?

“Click” went the pens of consumers signing on the dotted line, so “boing” wouldn’t happen to them.

‘Thwack’

Now Bloomberg reports that the Consumer Financial Protection Bureau is looking hard at nine of the nation’s largest banks, with the idea that those institutions are engaged in some sort of misleading marketing regarding the service. It’s perhaps not surprising that the CFPB is gunning for this: Last summer, it named its softball team “The Overdrafts.”

The CFPB allegedly is concerned that consumers don’t really know what they’re signing up for. It’s also peeved that the fees charged don’t have any correlation to the actual costs incurred by the banks.

While there may be a legitimate beef over the starkly greedy practice of clearing items from largest to smallest, the CFPB ought to be very careful. Because the issue at heart isn’t what the banks do, but what consumers do.

As long as banks aren’t rigging the game to create overdrafts (see “starkly greedy practice” cited above), it’s the consumer’s own behavior that triggers this service. No one’s charged a dime until a check or a debit card transaction turns up without enough moolah to back it up. That’s the consumer’s doing, not the bank’s. And if the consumer isn’t getting hit with an overdraft fee, he’ll still be paying an insufficient funds fee.

As for the egregious costs involved? They’re supposed to be punishing. The nature of banking is that people aren’t supposed to go around passing bad paper; if they do, there ought to be a charge so high it discourages such behavior in the future. An NSF fee is supposed to hurt; why shouldn’t a service that combines an NSF transaction with, essentially, a short term loan be even more painful?

The debate on all this has focused on banker greed. But that’s an ignorant argument. The issue isn’t whether banks should charge a lot for overdraft protection, it’s why consumers remain so careless with their accounting that they put up with it.

The cynical will argue that just having such a service available makes the deed more acceptable. But, unless we buy into the notion that consumer choice should be squashed, or believe consumers never wrote bad checks before overdraft protection, that assertion merely fuels the case for high fees. Because when we talk dichotomy of cause and effect, it’s not bank products pushing people into overdrawing their accounts, it’s people overdrawing their accounts pushing banks to create products that protect them.

Banks are businesses. They need to offer things that people want. What they can do to promote responsibility is to make products for the irresponsible outlandishly expensive in order to dissuade their use.

And when banks do so, should we castigate them for it? Even at $35 a pop, consumers are overdrawing their accounts left and right. Do we really think it’s a good idea to make overdraft protection less expensive? Wouldn’t that just drive more people into writing rubber checks?

Maybe the answer isn’t to pressure banks to lower prices, but to get them to raise them. First two overdrafts, $35 each. Next 10 are $50 each. After that, it’s $100 each.

Maybe that will drill fiscal responsibility into consumers, after all. Boing! What an idea!