Going into the red is becoming an even bigger financial drain
Regulators appear to be losing the battle against rising overdraft fees. Bank customers who sign up for overdraft protection services have significantly higher annual fees, a new industry report finds, and more involuntary account closures than those without one.
What began as a service to give customers flexibility with their accounts has turned into one of the banking industry’s biggest money makers, according to a report by the Consumer Financial Protection Bureau. “They’re a significant source of industry revenues,” CFPB director Richard Cordray said in a conference call. That wasn’t the way it was supposed to be, he says. Overdraft services began as “occasional courtesies” offered by banks, Cordray says, but now represent over 60% of fees from consumer checking accounts.
Since 2010, federal regulation has required financial institutions to get customer consent before charging overdraft fees. As a result, consumers typically have three choices when they have insufficient funds to cover a debit card transaction or ATM withdrawal. They can incur an overdraft penalty fee for a short-term advance, according to a 2012 report by the Pew Research Center; they can pay an overdraft transfer fee when the bank transfers funds from a linked account; or they can choose to have the transaction denied when they have insufficient funds, and pay no extra charge.
However, studies suggest it pays not to opt in to an overdraft program. Consumers with an overdraft program who overdrew their accounts paid an average of $225 in overdraft and insufficient-fund charges over the course of a year, according to the CFPB. The fees also varied widely: Consumers at some paid an average of $298 while consumers at others paid $147. What’s more, the Pew Research Center estimates that almost three-quarters of those who sign up for overdraft protection end up using the service. (The CFPB study did not include credit unions or banks with total assets under $10 billion, because they don’t fall under the CFPB’s authority.)continue reading »