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?