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ING Direct Electric Orange Overdraft Line of Credit

Last year, banks collected nearly $40 billion in overdraft fees, most of it coming from about 10% of its customers. Forty billion. While some of this will be curtailed with the recent CARD Act [3] and its rules regarding opt-in overdraft “protection,” it’s still a staggering sum. Bankrate [4] found that, in 2009, the average overdraft fee was over $30 a piece. While there’s something to said about personal accountability, greed is greed and thirty bucks seems excessive.

That’s why I smiled when I learned that ING Direct does it differently on their checking account. One of the benefits of being an online bank with a fairly new checking account product is that you aren’t a slave to making money. If you were a bank earning billions off overdraft fees, your shareholders would be furious if you jeopardized one of the best revenue streams in the freaking world. If you’re an online bank [5] who isn’t a slave to the money you earn by overcharging your customers, then you can do what ING Direct does – extend an optional line of credit and charge a reasonable interest rate.

ING Direct doesn’t charge you $35 every time you overdraft your checking account. They offer an overdraft line of credit, a pre-set amount up to $500, and they charge you interest. They don’t charge you double digit interest, they charge you an interest rate that would make low interest credit cards [6] look expensive – 4% above their ING Direct Prime Rate.

“Instead of a fee, ING’s overdraft charge for its Electric Orange accounts is an “overdraft line of credit” system that allows customers to write checks or use a debit card for more than their balance (up to a preset amount usually no greater than $500) and pay back the overage with interest, which is the ING Direct prime rate plus 4% (currently 7.25%). While ING customers do pay for overdrafts, it’s not a flat fee, but interest paid on the amount “borrowed.” For example, on $100 at the current 7.25% rate, a customer would pay about 60 cents for one month.” (link [7])

Incidentally, Everbank [8] uses a similar system of protection via line of credit on their checking account. The difference is that their interest rate is based on the Prime Rate as published in The Wall Street Journal.

What do you think?