The government asked big banks how they handle overdrafts, and has now concluded that overdraft protection hurts the people who need it most more than it helps them.
The Consumer Financial Protection Bureau was curious to see the impact of a 2010 regulation that required banks to ask customers whether they wanted overdraft protection on their nonrecurring transactions.
Banks used to make that so-called overdraft protection automatic — processing transactions regardless of the amount in an account, and then hitting customers with an overdraft fee as high as $35 per transaction. (Banks can also stack the deck by deciding on the order your pending transactions are processed.) Under the new rules, customers who want overdraft protection of this sort have to “opt in.”
Despite the change, banks made $400 million more on overdraft fees in 2012 than in 2011, for a total of $32 billion. Their policies for handling overdrafts also vary widely, the CFPB says. Here’s what its study found:
- Between 20 percent and 27 percent of bank accounts opened in 2011 had an overdraft or NSF (insufficient fund) transaction that year.
- The average total amount of overdraft fees paid on accounts that were overdrawn in 2011 was $225, but varied as much as $201 among banks.
- 27.8 percent of consumer checking accounts opened in 2011, at the banks that thoroughly track overdrafts, incurred more than 10 such charges for the year.
- 6 percent of consumer checking accounts were closed by banks in 2011, mainly because of unpaid negative balances.
- Overdraft opt-in rates were higher in 2011 for new customers than for existing customers, but “varied dramatically, ranging from single-digit percentages to more than 40 percent.”
- 15.2 percent of account holders opted for overdraft protection, but among those who frequently overdraw their accounts, the figure was 44.7 percent.
- Overdrafts provide 61 percent of the fee revenue banks get from consumer checking accounts.
The study doesn’t say how many or which banks provided overdraft data, but does say “while not representative of the market as a whole, [they] collectively hold a substantial percentage of domestic checking deposits.”
The CFPB says it will use the findings when considering whether further regulation is needed, and emphasized that banks currently handle overdrafts in a wide variety of ways.