The FDIC began collecting data on overdraft fees just last year and banking industry officials note that the increase may just be a blip or simply reflect that they have more customers.
But the rise comes as the Consumer Financial Protection Bureau is researching how banks levy overdraft fees on customers who bounce checks or withdraw more than they have in their accounts using debit cards or automated teller machines. Earlier this year, the agency asked the country’s largest banks to offer accounts that do not charge overdraft fees.
“Over the years, overdraft programs have become a significant source of industry revenues, and a significant reason why many consumers incur negative balances,” CFPB Director Richard Cordray said in a February hearing. “Too many problems with overdrafts can cause people to give up on the banking system or force them out of it altogether.” The agency is preparing to issue an outline of potential rules later this year.
The recent increase in overdraft fees also coincides with a rough period in the banking industry. The financial sector has been whipsawed lately by a volatile stock market, which experienced weeks of deep declines before recovering more recently.
Regulators have targeted overdraft fees before. In 2010, regulators forced banks to get consent before charging customers fees for ATM and debit card transactions that exceed their accounts. The change cost banks billions, according to industry officials, but consumer advocates say overdraft fees continue to impose heavy costs on the poor.
A 2014 CFPB study showed that about 8 percent of bank customers pay about 75 percent of all overdraft fees. And much of the time, the purchases that trigger overdraft fees are minor. The median debit card transaction that ends in an overdraft fee is $24, according to the bureau.
The average “heavy overdrafter” — those who overdraft their accounts at least three times a year — paid nearly a full week’s worth of annual household income in overdraft fees in the past year, according to a 2015 Pew Charitable Trusts report.
“Some banks still live off the overdraft,” said Erik Oja, a banking analyst at S&P Global Market IQ.
Overdraft fees began piling up in Davis Clark’s Wells Fargo account after he lost his job in February. The 26-year-old fell behind on bills, including about $9,000 in short-term loans he had taken out to help cover his living expenses. Each time the lenders tried to automatically withdraw payment from his checking account — his monthly payments added up to about $550 — he was hit with a $35 charge from his bank for not having sufficient funds.
By the time Clark started a new job as a data analyst less than two months later, his checking account was negative by more than $1,400. The debt that ate up more than half of his first paycheck and made it more difficult for him to catch up on the rent and other bills. Last week, Clark opened up a second checking account with another bank so that he could avoid having his earnings eaten by overdraft fees. But with the charges continuing to pile up on his first account, he worries he will have little choice but to file for bankruptcy to clear the loans and overdraft fees.
In a statement, Wells Fargo didn’t address Clark’s case directly but noted federal law allows customers to stop a merchant from taking automatic payments from their bank account.
“In order to exercise that right, consumers should call or write the company and inform them they are ‘revoking authorization,’ ” the bank said. “When a consumer contacts Wells Fargo and informs us they have revoked authorization for a merchant to take automatic payments, the bank will place a stop payment on their account. Additionally, if a merchant submits an automatic payment after the authorization has been revoked, a claim will be processed for the transaction, and any fees associated with that transaction will be refunded.”
Still, consumer advocates are pushing for regulators to tackle the issue by the end of the year. In particular, they want a ban on the practice of what is known as “reordering” in which banks process larger transactions, such as a rent check, before smaller purchases even if the smaller purchases were made earlier in the day. Consumers then could face multiple overdraft fees for each of the other small purchases made that day, instead of facing a single overdraft fee for the larger purchase.
“We still have these people being pushed out of the banking system because of overdraft policies,” said Susan Weinstock, director of Pew Charitable Trusts.
Banking industry officials say they have already significantly changed their overdraft policies and that more data is needed before drawing conclusions about the increase seen in the new FDIC data.
A Bank of America spokesman declined to comment on the FDIC’s latest data, but noted that in 2011 the bank said overdraft policies required by regulators, and some it put in place on its own, would cost it about $2.8 billion a year. It collected $393 million in overdraft fees in the first quarter of this year, compared with $371 million during the same period in 2015, according to the FDIC data, which earlier had been reported by the American Banker.
Wells Fargo has already made it easier for customers to view their account balances and the bank has taken other steps to help customers avoid overdraft fees, said Kristopher Dahl, Wells Fargo spokesperson. “The increase in overdraft fee income over this time period was driven by both the growth in our deposit customer base and by customer spending behavior,” he said. The bank collected $411 million in overdraft fees during the first quarter, compared with $355 million during the same period last year.