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The Future of Bank Fees

posted by Elizabeth Warren

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. 


Perhaps it's worth asking (because the bank certainly will): is an overdraft charge a "penalty" or a "service fee?" A quick glance at my own bank's website confirms that they never use the word "penalty" with regard to these charges. If these are "service fees" the bank is only performing a contracted service and can charge as much as the market will bear.

What about the service fee charged by the retailer? The bank at least gives the customer a statement of "terms and conditions." The retailer charges up to fifty dollars or so for NSF checks and notice is served only with a sign on the wall. Has anyone calculated his true costs? I think, actually, this fee is intended to make the check easier to sell to a collection service for something near the actual debt.

My mortgage holder charges a fee of exactly 43.92 for making payment more than two weeks late and thirty dollars for giving them an NSF check. These are both described as "fees." Apparently the FHA regulates these fees, but only on FHA loans.

I have no doubt the bank makes out very well on these fees, but the court may give the bank more latitude in its margins if they can successfully defend overdraft processing as a "service."

Can you even get to argue contract law? Presumably binding mandatory arbitration and class action waivers take over and shuffle disgruntled consumers off to arbitration, where who knows what goes on. Even if a single consumer wins in arbitration on a contract theory, there's no precedent created whatsoever. If you could get into court, I think the contract arguments would have some force, but as with various credit cardholder agreement provisions (such as retroactive application of interest rates, penalty provisions, and price points left entirely to one counterparty's determination), we never get to test their legality.

Also, notice that the British case was brought by a consumer protection agency, not individual depositors. I don't think a government agency would have standing to raise the contract enforceability question--it would have to be under some sort of deceptive trade practices statute or the like. And we know what would happen here if a state consumer protection agency tried to bring such a suit--federal preemption. BMA and federal preemption appear to have neutered most consumer protection in the financial services arena.

It may be instructive to point out that the anti-consumer nature of U.K. bank fee-charging behaviors has achieved such notoriety that the popular BBC News website carries a link "How to claim back bank charges" to enable consumers to download the documents necessary to reclaim these charges and the instructions for filing.

A number of websites including www.moneysavingexpert.com, www.penaltycharges.co.uk and www.which.co.uk, provide step-by-step guides for claiming refunds from their banks. Customers can even download draft claim letters.

One of these sites reported that over 800,000 of the draft letters had been downloaded in just three months, and that 20,000 letters were being downloaded daily.

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