A survey by the Consumer Financial Protection Bureau (CFPB) says that most overdraft charges are caused by debit card transactions of less than $25.
The CFPB is putting out a call to investigate overdraft charges that they say are unfair to consumers who can little afford them. An overdraft charge is incurred when a bank pays a charge that results in a negative balance on a checking account. Instead of declining a transaction that a consumer’s account doesn’t have funds to cover, the bank will go ahead and approve the charge – but it will cost the accountholder an average of $34 per incident.
The CFPB also found that the majority of accounts charged for an overdraft are brought up to a positive balance within three days. Since the median overdraft charge is $34 and the majority of transactions that incur overdraft charges are $24 or less, it’s the equivalent of a three-day loan with an annual percentage rate of 17,000%.
Richard Cordray, director of the CFPB, called the charges a burden on consumers whose account balances don’t leave much room for miscalculation. “Today’s report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card,” he said. “Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards.”
Account holders must “opt in” for overdraft charges, but there’s a loophole
In 2010, banks were required to get customers’ permission before allowing overdrafts and charging them fees. This is known as “opting in.” However, this only applies to ATM and debit card transactions. Checks or automated payments (like ACH payments) are exempt from the opt-in rule. Banks can cover these charges and charge an overdraft fee, or reject them and charge an insufficient funds fee.
People can overdraw their accounts a number of ways: by writing a check, withdrawing cash at an ATM, using a debit card or signing up for automatic bill payment. Debit purchases do not always go through on the day they are initiated, resulting in an “available balance” statement that does not reflect the true balance of the account. This can make customers overdraw their accounts if they don’t realize that pending purchases are not yet reflected on their available balance.
Eight percent of accounts incur majority of charges
The CFPB found that the majority of overdraft charges are incurred by only 8% of accountholders. Overdraft fees and insufficient funds fees make up more than half of the income banks make on checking account fees. This study highlights the fact that banks are making money off of a small percentage of customers who are, essentially, borrowing a small amount of money for a short amount of time.
Eighteen percent of accounts that have opted-in for overdraft fees go into overdraft more than ten times a year. Six percent of non-opted-in accounts go into overdraft more than ten times a year, resulting in payments not made for insufficient funds.
The CFPB says they will continue studying overdrafts and consider what consumer protections should be put into place.