Perhaps the most despised bank fee among consumers is the overdraft fee, an ugly $30 (or so) insult to your wallet. Many consumers have been hit with it at one time or another, usually when it’s the absolute last thing they need.
The depth of consumer disgust for such a high fee is, alas, equally matched by the abiding love banks, thrifts, and credit unions have for the billions of dollars in annual revenue they provide.
Overdraft services began decades ago as a simple service for customers without calculators: If you didn’t have enough money to cover a check, your bank saved you from bouncing it. But we’re talking banks, here, so nothing is for free.
A new report from the Consumer Financial Protection Bureau shows just how much of a bite overdraft fees can take out of some consumers, and provides new prototype disclosure forms it hopes banks and credit unions will adopt. The CFPB examined overdraft fees on debit cards and ATM withdrawals for people who frequently find themselves overdrawn on their checking accounts. Among those who paid 10 overdraft or non-sufficient fund (NSF) fees a year, those who opted into a bank’s overdraft service paid as much as $450 more in fees than those who had similar behavior but who didn’t opt in to overdraft coverage.
Consumers that had more than 10 overdrafts or NSFs in a year make up nine percent of the 40 million accounts the CFPB studied at a small number of large banks, but they paid 79 percent of the banks’ total overdraft and NSF fees. Of that universe, those who opted into an overdraft service typically paid 18 fees a year for a total of $612.
Frequent overdrafters who didn’t opt in typically paid five fees a year for a total of $170.
A 2014 Pew Charitable Trusts study found that in 2013 “10 percent of Americans paid at least one overdraft penalty, and another 5 percent paid an overdraft transfer fee.”
What makes this all particularly perverse is that the CFPB estimated in previous studies that most debit card transactions leading to overdrafts are $24 or less. That small overdraft, however, can lead to a cascade of big fees if the consumer doesn’t catch it, and thus continues to use the card as usual or doesn’t pause automatic payments for cable, power, and the gym.
Senator Cory Booker of New Jersey, a Democrat, has inquired of banks for information on their overdraft programs, and several class actions against credit unions, which depend heavily on theses fees, have been filed in recent years.
Nevertheless, it’s become a bit easier to avoid overdraft fees in recent years. A regulatory change that became effective in 2010 requires that, for banks to charge you an overdraft fee on a debit card purchase or ATM withdrawal, you first have to opt-in to its overdraft service. If a consumer doesn’t opt in to the service, which costs nothing until it kicks into action, their transaction can simply be refused because they don’t have enough money in the account. The regulation doesn’t apply to checks or scheduled online bill-payments, though, which is why one overdraft can cascade into a string of fees if automatic payments aren’t halted.