They are one of the best-kept secrets of German financial institutions: The interest rates charged to bank customers for overdrafts. Experts estimate that banks demand between 4 and 12 percent from their customers when they exceed the agreed-upon limits to their discretionary borrowing facility.
Up to now, the banks have doggedly ignored the historically low interest rates of the European Central Bank. This unabashed form of cashing-in has long been a thorn in the side of the German government.
But now it is seeking legislation to force the financial institutions to end this secrecy. In the future, banks will be required to post information regarding overdraft terms on their websites. “In this way, we will make it more difficult for banks to charge excessively high interest rates for overdrafts,” said Heiko Mass, federal minister for justice and consumer protection, who worked out the plans.
For many people, a bank overdraft can become a debt trap. Mr. Maas says that frequently “this is an indication that private insolvency is not very far off.”
“The rip-off happening with overdraft interest rates will not be brought to an end by the half-hearted initiative of the federal minister.”
On average, a heavily indebted German is in debt to the tune of more than €34,000 ($36,800). In 2006, the figure was €36,900; but at 100,000 per year, the number of private insolvencies continues to be worryingly high.
Out of the 98.55 million checking accounts in Germany, 75 percent offer an overdraft facility. Almost two million of these are considered to be extremely excessive. At the moment, the total amount owed on overdrafts is €34 billion.
At the behest of the federal government, banks are supposed to advise customers who have overdrawn their account by half their average incoming payments for three months, or who have used 75 percent of their credit allowance for six months or more. Banks must offer heavily indebted customers alternatives to an overdraft.
“The counseling is aimed at making the borrower aware that using the overdraft provision only makes economic sense for short-term handling of tight financial situations,” states the legislative draft.
Opposition parties and consumer advocates say the new rules are not sufficiently far-reaching. The left-leanign government of the state of Hamburg announced an initiative in the Bundesrat, Germany’s upper legislative chamber, for a law limiting overdraft charges to “a maximum of eight percent” above the benchmark Euribor interest rate.
Banks’ room to maneuver regarding overdraft interest rates could soon become even more limited. And their revenues could be endangered.
The surveys of banks conducted each fall by Stiftung Warentest are notorious. The German consumer-advocacy association regularly discovers excesses in overdraft credit terms. Things won’t be different this year either, because many financial institutions continue to charge their customers double-digit interest rates. And not a few demand even higher premiums in the case of so-called “tolerated overdrafts” that exceed the agreed-upon limits.
It is a lucrative market for credit institutions. With the current volume of overdraft credits around €34 billion, every extra percent point means additional revenues of €340 million.
Consumer advocates are up in arms. For a good while now, banks have had access to refinancing on fantastic terms at the European Central Bank, currently 0.05 percent. But the interest-rate advantages are not passed on to customers.
FMH Finanzberatung, a consultancy, has identified the degree of divergence. In a current listing, the overdraft interest rate at Deutsche Skatbank is 4.49 percent, while at Sparkasse Langen-Seligenstadt it is 12.38 percent.
“The rip-off happening with overdraft interest rates” will not be brought to an end by the “half-hearted initiative of the federal minister for consumer protection,” says the Green Party’s spokeswoman for consumer policy, Nicole Maisch.
German banks, however, are contented for two reasons: Capping has been avoided, and the counseling offer must only be made to customers who use the overdraft credit over an extended period of time and to a significant degree.
But consumer advocates do not consider counseling by the banks to be a good idea. “If we could be sure an installment loan would be recommended during the counseling, that would be okay, but the banks pursue their own interests,” said Dorothea Mohn from the umbrella consumer-protection association Bundesverband der Verbraucherzentrale. She wants to see budget or debt-advisors getting involved, as they are more likely to make objective suggestions.
The financial institutions insist that they should be the ones to determine the interest rate. “We continue to hold the opinion that the overdraft interest rate should be determined by the market,” says Uwe Fröhlich, president of the Federal Association of German Cooperative Banks.
“The overdraft interest rate is high because it is an unsecured loan, the bank does not make any extra risk assessment and there is no repayment obligation as in the case of a classic loan,” says Andreas Pratz, partner at the consulting firm AT Kearney.
At the same time, banks could be more forthcoming about how they calculate the rate of interest for overdrafts. “Financial institutions in other countries already do that,” he said.
At the moment, banks would be loath to reduce interest rates for overdrafts because there is already downward pressure on revenues from private customers.
The tough competition in Germany is taking a toll. Bank customers must pay comparatively little for banking services, in spite of high interest rates for overdrafts, as was shown by a recent study by the Boston Consulting Group. The minimal rates of interest in the euro zone make the situation even more difficult.
Elisabeth Atzler is a banking correspondent at Handelsblatt. Frank Drost reports on the consumer and banking industries from the Handelsblatt bureau in Berlin. To contact the authors: firstname.lastname@example.org, email@example.com