The Future of Bank Fees
The Brits may be showing us the future on bank fees. First, the pain: British banks charge an average of $57 for an overdraft, about 70% more than US banks. Second, the response: A movement has swept across Britain to sue banks over the fees, claiming they are unfair. The top five banks have already refunded $810 million, and the litigation marches on. A huge test case is pending.
Consumer advocates claim that the cost to the bank of providing overdraft service is about $9 per transaction. The litigation focuses on the applicability of consumer protection laws to bank services in the UK, but I confess that this makes me think about plain old contract law. The banking relationship is based on a contract, so what happened to the long-established contract principle that damages for breach must be reasonably related to actual or anticipated harm? Common law distinguishes a "penalty," which is unenforceable, from a more moderately priced liquidated damage clause, which is OK. $9 v $57 looks like a penalty unrelated to actual costs. And, for the US banks, isn't the same true? If an overdraft costs about $9 (processing, risk, etc.), doesn't a charge of $35 look like a penalty?
In fact, I mis-stated the common law rule, as handed down by Kemble v. Farren. That contract law staple required that the penalty clause be in an amount that was a reasonable estimate of BOTH actual and anticipated harm. The UCC loosened that up a bit with 2-718(1), but the new Article 2 reminds us that the party hoping to collect the penalty bears the burden of proving that the penalty is reasonable and that calculating actual damages is infeasible. Of course, the loosening of the standards is applicable only to sales of goods.
Of course, if this is a problem for banks, it might be a problem for credit card companies too. Can they show that when a customer is one day late that it cost the card company $39? Hmmm.
I know it sounds pokey to raise these musty old contract principles, and I clearly expose myself as a teacher and tormentor of first year law students. Even so, with banks and credit card issuers raking in billions of dollars on penalty fees, perhaps it is worth thinking about whether contract law permits such charges.