Overdraft Fees, Merchant Fees And Crypto: Why You Can’t Have It Both Ways

Karen Webster
11 min readJun 1, 2021

Senator Elizabeth Warren’s exchange with J.P. Morgan CEO Jamie Dimon on overdraft fees has been viewed 750,000 times in the first 24 hours since the May 26 Senate Banking Committee hearing that spawned it, according to a Newsweek report.

That made-for-TV moment came when Warren challenged Dimon to commit — on the spot — to refunding the $1.4 billion in overdraft fees that the bank collected during the course of the pandemic, on top of the fees that J.P. Morgan had already been refunded at the request of the consumer.

To which he flatly answered no.

Warren later took to Twitter to crown Dimon “the star of the overdraft show” as part of her ongoing media tirade to discredit the various multi-billion-dollar efforts made by the largest financial institutions (FIs) to support consumers during the pandemic. She told bank CEOs at the start of the hearing that their forbearance programs and other initiatives, including the refund of overdraft fees at the consumers’ request — intended to help consumers weather the pandemic-imposed financial crisis — were “a bunch of baloney.”

It’s a great and timely example of how we can’t have it both ways — the collective “we” consisting of regulators, policymakers, innovators, payments players, merchants and consumers — even though the narrative that we can have it both ways feeds the media beast.

And by both ways, I mean selectively targeting some for providing and monetizing services that consumers want and use, without considering the downstream impact to those consumers if those services are suddenly taken away, regulated out of existence or made too costly for service providers to support.

Never Attack An Overdraft Fee When It’s Down

As unpopular as it is to let facts get in the way of a great story, bank overdraft fees in 2020 were down 10 percent, reaching their lowest level in six years. The median overdraft fee was $30, according to reporting in The Wall Street Journal on May 30.

There are a few reasons why.

Consumers who worked from home, or didn’t work at all, didn’t spend as much money as they once did. They also saved on commuting and other work-related expenses, and smartly banked what they didn’t spend. Stimulus and unemployment booster checks added to bank account balances, and forbearance programs gave pinched consumers some breathing room to get their financial houses in order. Those who incurred overdraft fees and asked for a reversal, got it.

The NY Fed produced a report a few weeks back lauding the efforts of these bank forbearance programs, crediting them with saving consumers from undue financial hardship, improving their credit scores and giving them a chance to divert mortgage payments to pay down credit card debt without fear of credit score reprisal. That report also stated that most of the consumers who were once in forbearance programs are now successfully out of them.

There are also a lot of reasons why consumers overdraft.

Some people still use checks to make payments, and don’t know when those checks will clear and hit their account. And more of them probably use checks than they realize — online bank bill payment services often pay billers with checks, creating the same consumer uncertainty. That’s a flaw with the legacy batch-based, paper-based payments systems. It’s a flaw that banks are investing tens of billions to remedy by moving to the cloud and to real-time, and why FinTechs are developing new apps and platforms to solve specific payments and financial services use cases.

But as payments go more digital, transactions become more abstract and harder to track. A lot more people use debit cards — including for smaller-dollar purchases that they once made in cash. Not everyone uses mobile banking — although many more do now thanks to the pandemic, to monitor those daily transactions and check to see when they post to their account.

At the same time, there is a fixed amount of money deposited in a consumer’s checking account, and it’s hard to know precisely when or what could trigger an overdraft. But if or when that happens, the biggest consequence isn’t having a transaction denied at a merchant, although that is embarrassing — it’s having an important bill payment bounce.

So then what happens?

If a consumer can make a deposit or transfer money right away, they can resubmit the bill for payment in order to avoid a late fee or service interruption.

Without immediate access to funds to cover the shortfall, a consumer can wait and pay the bill late, along with the late fee imposed by the biller. And they would risk having that late payment reported to the credit bureau.

Depending on the size and type of bill, they can tap one of several FinTechs that are in the business of providing short-term, small-dollar financing.

If they work for an employer that offers an on-demand payroll option, they can access wages earned in advance of the traditional payday.

As a last resort, they can go to a lender of last resort and pay fees for a short-term loan.

They can decide not to pay the bill, and risk losing access to the service.

Regardless, in all but the last scenario, the consumer would pay a fee to obtain access to funds, and possibly even late fees to the biller, depending on when the payment is finally made.

As they should. In each case, the provider is extending a service and taking on the risk of extending credit to give that consumer access to the funds needed to cover the shortfall.

That consumer could also allow their bank, with their permission, to overdraw their account to avoid a bounced bill payment and then pay an overdraft fee for that convenience.

Reg E now requires consumers to opt-in to overdraft protection on debit card, ATM and check transactions, and prohibits the egregious “stacking” of transactions that would have resulted in the $3.50 breakfast sandwich purchase costing $38.50 before this practice was prohibited. Banks also limit the number of overdrafts allowed in a day. Unlike billers, banks don’t report overdrafts to the bureau, so it’s not a ding to a consumer’s credit score.

Several banks are now piloting options that extend a free grace period to account holders for making their bank accounts whole if they overdraft, and they are only charged if they miss that window. And Request for Payment — a service that will let consumers pay a bill and have it posted to their account the day it is due — is now being piloted by a handful of large billers and FIs connected to the TCH RTP rails.

The RTP program is expected to roll out more broadly this fall and is supported by 25 FIs, as well as tech platforms including Fiserv and Jack Henry. Their goal is to offer their account holders more clarity and certainty about their bill payments experience and management of their household cash flow by making a bill payment on the day it is due without penalty. How that will be monetized is still to be determined.

Who Moved My Baloney?

Many, I know, will push back and make the point that none of this addresses the fact that those whose payments are returned can ill afford to pay the associated fees. But that’s a different and perhaps larger point that goes well beyond how people manage their spending, bank accounts and bill payments.

My point is that “we” can’t have it both ways.

We can’t at the same time demonize banks for providing and monetizing an opt-in service that consumers use when they need a short-term financial backstop, and criticize them when they do. And we can’t do so without leveling the same criticism to any of the alternative service providers that solve the really big problem created when consumers don’t have enough money in their account to pay a bill and then overdraw.

I’m not saying they’re doing anything wrong, either.

They, like the banks, are doing what all successful businesses do: making a valuable service available to help consumers eliminate a big and costly friction — and charging a fee to provide the service.

And that’s not baloney.

The “Merchant Pays” Model: No Such Thing As A Free Payments Lunch

Interchange fees are the payments equivalent of the Holy Wars.

For the last 60 years, ever since the card networks established a business model that made it possible for banks (and, later, others) to issue a general-purpose credit (and then debit) card — and for merchants to accept any and all of those cards carrying their acceptance marks — they have resisted paying those fees.

Over the last decade, their resistance has come in many forms: litigation, legislation (the Durbin Amendment for Debit Interchange), regulation (in the EU, where interchange is capped), surcharging (which is now permitted in 46 states) and cash discounts.

At the same time, merchants have tried to create and launch their own payments schemes to avoid paying them — and without much success. A great oldie but goodie worth reading is my MCX Fairy Tale — complete with its own villains — which I wrote in September of 2013, foreshadowing the collapse of the merchant-centric payments scheme before it was officially shuttered.

More recently, open banking payments have become the new black for ditching interchange and enabling account-to-account payments between consumers and merchants outside of the card rails in the U.S. and the EU. Merchants, it is reported, are motivated to move forward, since it will cost them less to support those transactions.

But will it?

When “Free” Means Merchants Still Pay

Merchants say that with the interchange savings, they’ll be able to offer rewards to their customers — rewards that more directly align with the merchant where the consumer is shopping. In order for the consumer to care, those rewards will have to be as good or better than what they get now. And as recent PYMNTS research shows, consumers aren’t all that keen to opt into merchant-centric loyalty programs unless they are making high-frequency purchases (like food) from those merchants. Consumers would rather have a more flexible and fungible earn-and-burn loyalty scheme.

Those merchant-centric payment schemes will have to offer the same frictionless refunds and dispute protections, along with the zero-liability fraud and security assurances that consumers are used to today. More generally, the wholesale shift away from cards and card rails and/or whatever method of payment consumers like and use today will have to come with the same utility and ubiquity that they are used to now.

And they will very likely have to include incentives to get consumers to switch.

All of that won’t be free.

Just like it isn’t free for merchants to accept one of the many buy now, pay later (BNPL) schemes that are growing in popularity today. Ironically, perhaps, for as much as merchants push back against the cost of acceptance, they are happily forking over even more money to enable this new method of payment, positioned as a way to drive new customer acquisition rather than accepting a new method of payment.

Once regarded as a niche Gen Z and millennial payments preference used by those with a distaste and distrust for traditional banks, BNPL use cases (and users) are expanding as many consumers find it to be a convenient and predictable option for making a purchase and paying it off completely over a specified period of time. For many, it is also the only credit alternative to make a purchase and build a credit history.

Over time, is it likely that many of merchants’ criticisms of today’s card networks will be leveled with BNPL players as the shininess rubs off the shiny new payments toy?


BNPL players are building their own consumer/merchant acceptance networks, managing those customer relationships, and adding more (and new) services to keep their customers loyal to their brand. For several, part of that strategy includes issuing debit cards for their consumers to use anywhere they shop, and to potentially convert those purchases to installment payments once they’re made. Some merchants worry that it cannibalizes their lucrative store card revenue. (It’s also a false claim, as shown by soon-to-be-released PYMNTS data.)

BNPL pure plays identified a friction in the market and built a solution to address it. Merchants benefit from the sales and the referrals from the shopping directories their users access to find places to shop. Consumers like having BNPL as an option — and for merchants to keep consumers shopping, they need to support the payment methods consumers have and want to use.

Merchants keep finding that they can’t have their cake and eat it, too — these new methods of payment cost merchants, just like cards, and for much the same reason: They drive incremental volume that merchants will happily pay for.

Currency Or Store Of Value: The Craze Over Crypto

Robinhood said that at the end of Q1 2021, 9.6 million of its users had established a crypto account and that three million of those accounts were opened in March. The company didn’t say what percentage of its users this represents.

PayPal executives have said that allowing PayPal users to buy, sell and store crypto has driven the number of active accounts and the number of times that those users access and use them.

Retail traders, in search of a quick hit, are opening accounts and making investments in a speculative asset that they hope turns them into crypto millionaires overnight.

And why wouldn’t they? Crypto multi-billionaires with the vast financial means to ride crypto’s volatility tweet about its future potential. Media pundits tout that it could go to one million a coin.

Until May, it all looked pretty rosy — until the law of physics took the blooms off of them.

Elon Musk did an about-face on the coin. China cracked down on mining, and regulators and tax authorities accelerated efforts to clamp down, too. Bitcoin has lost nearly half its value so far this year, with the steepest drop coming over the period of a few weeks in mid to late May.

At the same time, enthusiasts talk about its use as a currency, even though its volatility makes it anything but suited for that use case. Bitcoin was $58,000 on May 9, on May 31 a coin was worth $35,000, and it has struggled to break $40,000 and stay there since the May 9 decline. People living in developing economies are flocking to blockchain payments denominated in dollars to avoid that sort of currency volatility.

Undaunted, some of those retail traders are now chasing the “momentum” stocks like AMC and GameStop, two that the WallStreetBets crowd decided they wanted to save from bankruptcy as a social cause. Nothing at all to do with the fundamentals of the companies, just something to do for kicks — and for their (more than) 15 minutes of fame.

Leveling The Playing Field — And Bank Accounts

Many will say that making trading available to the retail investor “democratizes” access that was once unavailable. And it does. According to Charles Schwab, the retail investor who started trading in 2020, it now represents 15 percent of the overall market.

Can we assume that these newly minted retail investors understand the risk? Many say that they know they shouldn’t invest what they can’t afford to lose. But that’s also not typically why investors invest: They don’t expect to lose longer term — they expect to gain. Otherwise, they’d keep their money parked on the sidelines.

But many of these retail traders are just that — retail traders who reportedly like the volatility of crypto and meme stocks and follow the crowd. That’s part of the thrill — until, of course, the money is gone. Just like the thrill at the casino.

At the moment, regulators from all of the alphabet agencies are trying to navigate these very grey areas — allowing innovation to flourish, new asset classes to emerge and new forms of payments and rails to solve real problems for people and businesses. All while protecting the consumer from the risk of something going terribly wrong along the way.

Until they do, we can’t have it both ways: Volatile crypto can be a game for thrillseekers and speculators, or it could be a boring, secure alternative payment method — but it can’t be both.

In fact, maybe this is a guiding principle for thinking about payments as a business, and as something to regulate: The collective “we” can’t have it both ways.

Originally published at https://www.pymnts.com on June 1, 2021.