Banks’ bounced-check fees and payday loans are increasingly penetrating America’s economic landscape.

Both payday loans and bounced-check fees have drawn increasing amounts of attention from the Congress and regulatory bodies. Although payday loans are often criticized for being too costly, my analysis suggests they are actually less expensive than bank overdraft services for many consumers. The Congress and regulators should understand the true costs of these products.

The U.S. Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corp. and National Credit Union Administration issued joint guidance on check overdraft protections in February 2005. These agencies observed: “While both the availability and customer acceptance of these overdraft protection services have increased, aspects of the marketing, disclosure, and implementation of some of these programs have raised concerns.”

Across America, more than 18,000 financial institutions collect $32.6 billion in annual service charges from 56 million checking accounts, for an average of $582 per account. Bank service fees have virtually doubled from 1995 and 2003, from $16.4 billion to $32.6 billion. Significantly, overdraft-protection programs (also called “nonsufficient funds” or “NSF” fees) now represent the preponderance of banks’ and credit unions’ fee income.

Today, whenever a consumer bounces a check — or possibly overdraws from an automated teller machine (ATM), debit card, automated-debit feature, phone-initiated transfer or online banking transaction — an overdraft fee could be levied. According to one report, NSF fees averaged $25.81 per occurrence in 2004. The Federal Reserve’s latest payments study reported that 183.5 million checks “bounced” in 2003. Some experts believe an average checking account yields 13 NSF fees per year.

The retail payday-lending industry has grown tremendously, from virtually none in the early 1990s to about 22,000 nationwide today. To secure a typical 14-day payday loan, a borrower must prove income and have a checking account. Payday loans’ success may be linked to borrowers’ preferring them to bounced-check fees, utility shutoffs or other costs. Perhaps this is with good reason.

Although it’s tough to compare the cost of a typical payday loan to the cost of NSF fees, it’s not impossible. Available data suggest that the average bounced check is written for roughly $155. The average payday loan is $300 for a period of roughly two weeks.

Importantly, payday-loan providers must comply with federal disclosure requirements for the interest and other charges on the short-term loans they provide. However, NSF fees are not recognized by bank regulators to be “interest,” although they are interest in an economic sense.

Because of this regulatory anomaly, NSF charges avoid the disclosure requirements of the federal Truth In Lending Act and “borrowers” are not provided an annual-percentage-rate (APR) disclosure describing the true cost of NSF credit. If the effective APR of a short-term loan to cover bounced checks were applicable, rates could be revealed to be as much as 85 percent to 962 percent higher than a payday loan — depending on how quickly a borrower “settles up” and how large his or her bounced check is.

It is notable that a payday loan can cost much less than bounced-check fees and offers consumers a lower effective APR. Consumers need to recognize that overdraft protections are not subject to Truth In Lending Act disclosure requirements and that NSF fees are likely to represent a significantly larger economic cost than is generally understood.

Notwithstanding critics, payday loans clearly spell out this information and can be a less costly alternative to bounced-check fees. Congress and regulators should take note.

Lehman is a professor of economics at Indiana Wesleyan University.