What that $34 overdraft fee is really costing you

Consumer Financial Protection Bureau Director Richsrd Cordray.
Consumer Financial Protection Bureau Director Richsrd Cordray.

Here's an interesting factoid: People tend to incur a median overdraft fee of $34 on debit card transactions of $24 or less, but deposit money to cover the charge within three days, according to the Consumer Financial Protection Bureau.

But here's a scary thought: That's the equivalent of a loan with an annual rate of 17,000 percent. Ouch.

That calculation is featured in a new study on overdraft released Thursday by the CFPB. The report raises concerns about the impact of regulation that forced banks to get consent before charging customers fees for covering ATM and debit card transactions that overdraw their accounts.

Despite this "opt-in" policy, the CFPB said overdrafts continue to impose heavy costs on consumers who have low account balances. About 8 percent of customers at the nation's largest banks incur nearly 75 percent of all overdraft fees, according to the study. That figure jibes with an earlier study from the Federal Deposit Insurance Corp. that also said nearly 50 percent of young adults incurred overdraft fees, with some recording more than 10 overdrafts in a year.

"Opting in for overdraft coverage for debit card and ATM transactions is an expensive way to manage a checking account," said CFPB Director Richard Cordray, on a call with reporters. "Consumers use their debit cards nearly three times as often as they write checks or pay bills online.  As a result, consumers who opt in find that overdraft fees can pile up quickly on smaller debit card purchases."

When the Federal Reserve imposed the opt-in policy in 2010, it did not apply to checks or automated withdrawals, known as Automated Clearing House (ACH) payments. In those cases, banks and credit unions can choose to reject or cover the transaction, which would result in a non-sufficient funds fee. Or if the banks decides to cover the difference, it can hit the customer with an overdraft fee, regardless of whether the person opted in for the debit card coverage.

Consumers who opt-in for overdraft services are on average paying nearly $260 per year in overdraft and non-sufficient fees, compared to about $35 for folks who opt out. Opted-in accounts are three times as likely to have more than 10 overdrafts a year than account holders who wave off the service.


Banks may not be pulling in the $37 billion in overdraft revenue that they did before the Fed rule, but the $31 billion they made last year off of the service is nothing to sneeze at either.

“Banks offer this optional service to help consumers properly manage their deposit accounts," said Richard Hunt, chief executive of the Consumer Bankers Association."Studies have shown consumers value and appreciate the ability to cover expenses when they need.”

In fairness, the industry has made some significant strides in reducing your chances of getting hit with an overdraft charge.

Over half of the country's biggest banks now have a "de minimis" balance, a threshold for overdraft, according to research firm Moebs Services. That means if you overdraw your account by $6 at a bank with a $8 de minimis, you won't get hit with a fee. Nearly two thirds of big banks are also limiting how many times a customer can be hit with overdraft fees in one day, from as little as two fees to as high as 12 in one day.

While the CFPB applauded such efforts on the parts of the industry, the bureau said problems still persist.

"Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage," Cordray said. "But we need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent."

CFPB, which has jurisdiction over banks with more than $10 billion in assets, said it plans to continue studying overdraft before handing down any new rules. The bureau is expected to propose overdraft rules next year.

CBA's Hunt said, "We strongly urge policymakers to be cautious in their approach to regulating overdraft and to avoid completely eliminating the consumer’s ability to choose."

Officials at the bureau have taken an interest in the impact on low-income and young consumers as well as whether banks are clearly disclosing the terms of their overdraft programs.

Advocacy groups have warned that many consumers receive misleading information about overdraft protection and, in some cases, may not even know that they can opt out of the service. They have also raised alarms about banks maximizing the number of overdraft fees by processing transactions from largest to smallest, rather than in the order they occur. This so-called reordering, which can drain a consumer's account and trigger multiple overdraft fees, is also being reviewed by the CFPB.

Danielle Douglas-Gabriel covers student debt. Before that, she wrote about the banking industry.
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