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Overdraft “Protection”: A Misconceived Market Worth Tens of Billions to Banks

Posted in Banks and Financial Services

Okay.  I am guilty.  I have overdrafted on my bank account.  Yes, more than once.  Shhhhh.  So I am fine with my bank “honoring the charge” and assessing a reasonable fee; a fee that has some relationship to the actual cost to my bank—which may just have to do something as simple as automatically transfer money from a linked savings account of mine.  But I am not like most people, according to a study by the PEW Center.

Mark Twain condemned statistics as worse than both lies and damned lies.  Well yes, he is Mark Twain, but statistics may in some cases—gasp—actually tell the truth.  The PEW Center recently released the following results from its May 2012 Overdraft America study:

  • Nine of every ten Americans have a checking account, and 18% have overdrafted in the past year.  Over half of those overdrafters were unaware or did not think they had opted into the coverage, yet they were left paying a fee that averages $35 per overdraft.
  • More than three in five overdrafters feel that overdraft protection mostly hurts those it purports to protect.
  • Fully three quarters of overdrafters would prefer that their transaction be declined.
  • Almost a quarter of overdrafters did not pay off their overdrafting fee on time—many because they were unaware they had the “coverage” and thus were unaware of the fee—and as a result incurred additional “extended overdraft fees.”
  • Overdraft fees adversely impact young and low income consumers.  Over half of overdrafters are under 34, and almost two thirds make less than $30,000 per year.
  • Many overdrafters do not find out about the fee until reviewing checking their bank account statement, which is twice as common as any other method of notification.

All due respect to Mark Twain, these numbers don’t lie.  They belie a lucrative industry (tens of billions of dollars in overdraft fees alone) that takes advantage of confused customers, most of whom don’t even realize they have the service.  “Hey, it’s a debit card, if I don’t have money on it my transaction will just be rejected.”  Not so much.

Whatever failsafes are currently in place, they have clearly failed to educate an American populace that is largely opposed to overdraft protection, especially at a going rate of $35.  (Perhaps more egregious than overdraft protection, which is covered by the bank itself, is the $10 average charge for overdraft transfers, which move the accountholder’s own money from another account to her checking account to cover the transaction.  “Wait…  You’re charging me to pay my bills with my own money?”)  Yet banks continue to rake in profits from unsuspecting consumers.

As with any consumer issue, some of the burden rests on our shoulders to more diligently manage finances and monitor the terms of our accounts.  But PEW also looks to the Consumer Financial Protection Bureau to establish rules limiting fees and regulating disclosures to consumers, and I second that thought.  Fees for “services” like overdraft protection should be neatly laid out on one matrix that accountholders can reference (rather than five or six, many of which still simply reference other contract information).  Moreover, the default should not be enrollment; rather, banks should be required to “offer” the so-called service to customers, who can then choose to enroll if it’s worth being charged $35 every overdraft.

Again, the statistics show that at least three quarters of overdrafters would not choose to enroll in overdraft protection—little wonder the banks haven’t made more of an effort at honesty, huh?  Those tens of billions might dry up pretty darn quickly.

I guess these days, there are lies, damned lies, and the things your bank tells you.

 

Assisted by David T. Martin