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Report Finds High Debit Card Overdraft Fees

January 29, 2007

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Debit cards have replaced old-fashioned checks for millions of consumers because they're simple and convenient.

They're so easy to use, in fact, that a new report suggests consumers are more likely to overdraw their accounts, resulting in costly fees.

"What banks are calling 'bounce protection' is starting to look more like a 'protection racket,'" said Eric Halperin, director of the Center for Responsible Lending's Washington office and a co-author of the report.

"Banks are raking in fees from unwitting customers who would not overdraft if given a choice."

The report, "Debit Card Danger," analyzed the checking accounts of more than 5,000 customers of the nation's 15 largest banks and found that debit card purchases and ATM withdrawals trigger 46 percent of high-cost overdraft loans. Written checks, on the other hand, are responsible for just over one quarter.

Making an in-store debit card purchase is by far the most expensive way to overdraft, costing $2.17 for every dollar borrowed. By comparison, check-triggered overdraft loans cost $0.86 per dollar borrowed.

The group says these findings refute the contention commonly made by banks and credit unions, many of which also have fee-based overdraft programs, that they are protecting consumers by sparing them the expense of bounced checks.

CRL says banks could prevent debit card overdrafts at checkouts and ATMs by denying the transaction or warning the customer, though doing so would eliminate the opportunity to charge an average $34 fee.

Yet a survey of account holders conducted in conjunction with the analysis of checking account transactions showed that people want the chance to avoid spending into the red. Some 61 percent of the 2,400 surveyed preferred that their debit card purchase be denied at the checkout if it would otherwise overdraw their account and incur a fee. Nearly all responded that they would cancel their ATM withdrawal to avoid a fee.

In the last Congress, Rep. Carolyn Maloney (D-NY) introduced a bill that required banks to report the APR on overdraft loans, get written consent before putting customers in "bounce" protection programs, give overdraft warnings at the ATM and stop manipulating debit and credit processing in order to generate more fees.

Maloney plans to introduce similar legislation this year.

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