Which of the following best explains why banks have widely varying policies on overdraft fees?

• A. Overdraft fees are determined solely by the interest rate set by the central bank.
• B. Banks compete for different types of customers and set overdraft fees to maximize their own profits.
• C. Government regulations require all banks to charge the same overdraft fees.
• D. Banks must set overdraft fees based on the average income of their customers.

Answer: (B)

Verified step by step guidance

1. Understand the concept of overdraft fees: These are charges banks impose when a customer withdraws more money than is available in their account, effectively borrowing from the bank temporarily.
2. Recognize that banks operate in a competitive market where they aim to maximize profits by attracting and retaining customers with different financial behaviors and needs.
3. Analyze why overdraft fees vary: Since banks serve diverse customer segments, they adjust fees to balance attracting customers and covering the risk and cost of overdrafts, rather than following a uniform rule.
4. Consider the role of government regulations: While regulations may set some limits or disclosure requirements, they typically do not mandate uniform overdraft fees across all banks.
5. Conclude that the variation in overdraft fees is best explained by banks competing for different types of customers and setting fees strategically to maximize their own profits.