Pew Study Finds Banks Still Rake In Overdraft Fees

Regulatory changes now require banks to obtain customers' consent to be enrolled in debit card overdraft protection. That was supposed to end the practice of consumers being charged a $35 anytime they made a purchase that exceeded their balance.

According to the Pew Health Group’s Safe Checking in the Electronic Age Project, it may not be working out that way.

According to the report, these charges are estimated to cost Americans $38.5 billion in 2011, which would be an increase of $18.6 billion since 2000. While banks have to incur a risk that they will not be repaid, most institutions manage this by limiting the overdraft amount given to any costumer.

Big source of profits

In recent years banks have made huge profits on overdraft fees. Until the regulatory change, a customer had no choice. If they used their debit card for a purchase and the amount exceeded the funds available, the bank covered the purchase, but charged the customer an overdraft fee.

Many consumers complained, saying they would prefer their purchase be declined instead of being covered, and then being charged a fee. Federal regulators thought that was a good idea, and changed the rules so that a customer had to “opt-in” to continue receiving that “protection.”

Banks mounted a furious marketing campaign, urging their customers to opt-in, lest they lose billions in revenue from these fees. Apparently, they have little to worry about.

Pew’s research reveals that the median overdraft penalty fee is $35, which is an increase from $27 in 2007.  Likewise, the FDIC documents the median overdraft amount at $36.

5000 percent interest

If overdraft fees were treated like a short-term loan with a repayment period of seven days, then the annual percentage rate, or APR, on the typical overdraft would be over 5,000 percent, Pew notes. Additionally, Pew found that as of October 2010, when the data was collected, 100 percent of the accounts that were examined retained the right to re-order withdrawals from the highest to lowest amount and eight out of the 10 banks reserved the right to post withdrawals before deposits. Since then, several banks have reformed these practices but the playing field is not level, the report says.

In a separate survey, the Center for Responsible Lending said 33 percent of major bank customers have “opted-in” for the expensive overdraft protection, and that most did so based on misleading marketing information from their bank.

“Sixty percent of consumers who opted in stated that an important reason they did so was to avoid a fee if their debit card was declined,” the CRL report states. “In fact, a declined debit card costs consumers nothing.”

'Wearing down their customers'

The report concludes banks “succeeded in confusing and wearing down some of their customers to the point that they accepted a product that would ultimately cost them unnecessary, exorbitant fees.”

Pew agrees that consumers need better information. The study says most checking accounts still carry the hidden risks of costly fees and need to be more transparent, pointing out the median length of checking account disclosure documents at the 10 largest banks is 111 pages.

“It is exceedingly difficult for the average consumer to find the basic information needed to either select a checking account or to responsibly manage the one they currently have,” said Shelley A. Hearne, managing director of the Pew Health Group. “We are calling on policy makers to ensure that overdraft fees are reasonable and proportional. They must also address both the length and clarity of checking account disclosures, which are often 111 pages.”

For this study, Pew analyzed more than 250 types of checking accounts offered online by the 10 largest banks in the United States, which hold nearly 60 percent of all deposits nationwide.