Of all the many fees that banks charge, the overdraft fee may be the most perverse. And the most infuriating.
Overdraft services began decades ago as a courtesy by banks to their customers: If you didn't have enough money in your account to cover a check, your bank stepped up, saving you the hassle and embarrassment of bouncing it.
Now that debit cards and recurring payments are increasingly popular, overdrafts can multiply as quickly as Gremlins in a swimming pool. One overdraft — a large rent check clearing, for example — can lead to many others. And it may be days before you realize you're triggering a $35 fee every time you pull out your debit card.
That fee of $30 or $35 might not seem like much, but the
Consumer Financial Protection Bureau estimates that the median debit card purchase triggering an overdraft is $24. In other words, the typical debit overdraft is essentially a loan with an interest rate that, in annual terms, measures in the thousands of percentage points.
Finally, most overdraft fees are entirely avoidable. Banks don't need to offer the protection of paying them on debit and ATM transactions. They could simply decline a transaction if there isn't enough money to pay it. Moreover, consumers don't have to sign up for services that supposedly protect them from overdrafts — but many do so without knowing it.
Given all the above, you might be agitated to know that four out of five large American banks continue to charge overdraft fees on debit or ATM transactions, according to a report issued on Tuesday from the Pew Charitable Trusts. Most charge at least $35 for each overdraft.
Citigroup Inc. is among the minority that don't let customers incur overdrafts on debit transactions or ATM withdrawals. JPMorgan Chase & Co. bans ATM overdrafts but does charge a fee on debit overdrafts.
Bank of America Corp. does the opposite, banning debit overdrafts but allowing ATM overdrafts.
The CFPB has said it wants to tighten regulations on overdraft fees next year, an initiative put in doubt by the results of the 2016 presidential election. Donald Trump's supporters have criticized the very existence of the agency, let alone its enforcement powers.
A lot of money is at stake. Because interest rates are so low, banks are relying more than ever on fees to cover the costs of holding onto customer cash. Overdraft fees made up 8% of banks' net income last year, Bloomberg Intelligence estimates, or $11.2 billion.
While banks have a right to make a profit, “the fees should be upfront and transparent,” said Nick Bourke, consumer finance director at the Pew Charitable Trusts. Rather than a courtesy that makes customers' financial lives easier, overdraft fees have become “a form of expensive, high-cost credit,” Mr. Bourke said. Banks should lower fees and limit the number of times customers can be charged in a year, he said, while regulators should encourage banks to come up with more affordable ways for customers to borrow to cover short-term cash needs.
At the very least, Pew argues, banks shouldn't be handling overdrafts in a way that maximizes fee revenue to the detriment of customers.
Banks can boost fees by reordering each day's transactions from highest to lowest: By clearing your biggest transactions first, the bank makes it more likely your account will empty faster, triggering more overdraft charges for smaller purchases that clear later — boosting bank profit at your expense.
Some banks have made consumer-friendly progress. Of the largest financial institutions, Pew estimates, 59% don't reorder transactions from highest to lowest. All but 9% limit any high-to-low reordering in some way. For example, they may reorder paper checks by size but tally up debit-card transactions chronologically.
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The trade group representing retail banks has, unsurprisingly, warned against further regulations that would prevent them from using overdraft fees to maximize profit. The Consumer Bankers Association has said more rules “will only add logistical complexity and increased consumer confusion without corresponding benefits.”
By shopping around, consumers can find banks that are less aggressive about collecting overdraft fees. Switching to a smaller bank isn't necessarily a solution, however: A Pew study of 45 smaller banks, also released on Tuesday, found that all but three offer an overdraft service for debit and ATM transactions, charging a median fee of $32.
Customers can deny their banks permission to charge overdraft fees in the first place, at least on debit and ATM transactions. By law, banks can't charge those fees unless customers sign up for an overdraft service. Consumers appear to be confused, however, as to what they've agreed to: A 2014 Pew survey found that more than half of overdrafting consumers don't remember signing up for coverage; more than two-thirds said they'd rather have a transaction declined than pay a $35 fee.
An overdraft fee may save you embarrassment in the checkout line, but most consumers would rather keep their $35.
