It’s difficult for
consumers to anticipate and avoid overdraft costs on their checking accounts.
Those are the findings
of a report by the Consumer Financial Protection Bureau, which found wide
variations across financial institutions when it comes to the costs and risks
of opting in to overdraft coverage on debit card transactions and ATM
withdrawals.
The report also found
that consumers who opt in for overdraft coverage end up with higher account
fees and more involuntary account closures than consumers who don’t opt in.
“What is marketed as
overdraft protection can, in some instances, create greater risk of consumer
harm,” said Richard Cordray, director of the bureau.
When consumers try to
withdraw more money from their checking accounts than is available, the
financial institution can reject the transaction. For some transactions, such
as checks, the institution usually charges a non-sufficient funds fee. The
financial institution can also choose to cover the payment by advancing funds
on the consumer’s behalf, and often charges an overdraft fee for the service.
Most financial
institutions have automated systems for handling overdrafts. The systems have
contributed to the evolution of overdraft from an occasional courtesy to a
significant source of industry revenues, said Cordray. The bureau estimates
that overdraft and non-sufficient funds fees make up 60 percent or more of the
fee income on consumer checking accounts.
Over the past decade,
federal regulators have taken steps to improve overdraft practices. The
bureau’s report will provide the basis to develop more uniform treatment of
these issues across financial institutions, he said.
The report is based on
data from large banks supervised by the bureau, other research, and information
from consumers.
Findings from the
report are:
Opting-in puts consumers at greater risk
In 2010, a new federal
government regulation took effect requiring that financial institutions obtain
a consumer’s consent or opt-in before charging fees for allowing overdrafts on
ATM withdrawals and most debit card transactions.
The bureau’s report found
that new customer opt-in rates varied across institutions. At some banks in
2011, more than 40 percent of all new customers opted in while other banks saw
opt-in rates of less than 10 percent. The report also found that a consumer’s
decision to opt in may have significant ramifications:
- Consumers who opt in end up paying higher
fees.
- Consumers who opt in to overdraft coverage
are more likely to end up with involuntary account closures.
Overdraft practices are highly complex for consumers
The bureau’s report
raises questions about the ability of consumers to anticipate and avoid
overdraft costs. Each institution’s overdraft policies, procedures, and practices
are highly complex and can be difficult for a consumer to navigate, yet greatly
affect whether and how often they’ll incur overdraft fees. The complexities
include:
- Complicated fee structures.
- Overdraft coverage limits often depend on
many factors.
- Complex transaction postings.
Costs and risks vary by institution
The different
overdraft policies, procedures, and practices lead to different outcomes for
consumers at different financial institutions. This raises questions about some
overdraft practices that can be difficult for consumers to navigate. The bureau’s
report found:
- Average annual overdraft charges vary among
institutions, with some consumers paying an average of $298 of a year
while other consumers at others paid $147.
- Involuntary account closures vary widely.
The bureau offers a factsheet for more information on overdraft practices.
The bureau plans to
review account-level data – which won’t contain consumers’ personally
identifiable information – to look at how differences in practices affect
consumers.
