Debit Card Overdraft Abuse Continues

Some major players opt-out of high-cost “protection” racket but many banks still benefit from excessive fees and account manipulation


Center for Responsible Lending
March 15, 2011

Some of the biggest banks in the nation still collect excessive fees from American families by encouraging overdrafts and manipulating their customers’ accounts.  Recent comments in the media suggesting that Americans overwhelmingly choose this costly product are suspect, in part because they overlook millions of customers at banks that do not offer the costly option for debit card transactions. These reports also ignore the impact of heavy-handed and deceptive marketing by banks who have sold costly overdraft “protection” as a beneficial program.

Bank of America and Citibank, the #1 and #4 banks in the nation in terms of deposits, do not charge fees for uncovered debit card transactions.  Instead, these banks decline them at no cost to customers or link customer checking accounts to a savings account or overdraft line of credit. There is no evidence that customers are leaving these banks—who currently comprise 20 percent of the market—in search of those that will automatically approve uncovered small-dollar debit card transactions for an average $34 fee.

When Bank of America announced its decision to discontinue high-cost overdraft “protection” on debit card transactions last year, a bank representative said, “What our customers kept telling me is ‘just don’t let me spend money that I don’t have’...We wanted to help them avoid those unexpected overdraft fees.”

A Consumer Reports survey from last fall reported that only 22 percent of bank customers had opted in to “overdraft protection.” Targeted, misleading marketing of customers with the potential for frequent overdrafts likely accounts for the higher opt-in rates reported by some specific banks.  Tellingly, many of these marketing campaigns did not inform customers that lower-cost options existed—including having debit card transactions simply declined for no fee.

CRL research has repeatedly found that Americans prefer to have debit card transactions declined at no cost rather than to pay a $34 fee for them to go through. This finding is supported by consumer complaints to regulators and their lawsuits against some major banks for reordering debit card transactions from high-to-low in daily balancing in order to boost overdrafts.  Despite these numerous complaints and lawsuits, some industry “experts” insist that consumers want banks to re-order transactions, even though this results in extra overdraft fees. But a survey by Consumer Federation of America last year found that customers overwhelmingly reject high-to-low reordering, and the FDIC recently instructed its banks to stop posting payments in an order that increases fees.

Opting in to overdraft “protection” without being told the cost of all options, or the risks, hardly constitutes an informed choice. More action is needed to provide Americans protection from overdraft abuse.

Related resources

  • The tactics banks use to persuade customers to opt in are described in an August 2010 CRL brief.
  • A CRL video helps explain how banks are playing with the numbers and gouging customers through this practice.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.