Banks stand back as debits and ATM withdrawals cause high-cost overdrafts for their customers
Rather than linking their customers' checking accounts to their savings or other resources to cover overdrafts, many banks and credit unions are automatically covering their customers' shortfalls with expensive short-term loans.
More overdrafts are happening when customers swipe their debit card or make an ATM withdrawal than when they write a check. In these cases, banks can warn customers or merchants when they have insufficient funds—but most do not. They can also decline the transaction and save the customer the overdraft fee—but most do not.
Our new research report, "Debit Card Danger," includes an analysis of a large database of bank account information and a survey of the account holders. We find that these bank customers have more overdrafts caused by a debit card purchase than by a written check, that debit card overdrafts are more costly, and that survey respondents would avoid the fees if given the choice.
Almost half of all overdraft loans are caused by ATM withdrawals or by debit card transactions at stores, restaurants, gas stations and other merchants.