Some banks are denying debit card overdrafts

And guess what! That’s a GOOD thing

Bank of America and Citibank cover debit card and ATM overdrafts only if their customers have signed up for more reasonably priced coverage, by linking their savings or line of credit to their checking account.

Q: Why is this A GOOD THING?

A: Three reasons:

  1. No more surprise high-cost overdrafts at the ATM or checkout for customers of these banks. These two banks are so big, it means one third of debit card transactions made each year are not subject to these high-cost fees.
  2. Since Bank of America and Citibank are doing it, more banks and credit unions may follow in order to stay competitive.
  3. This is a very good indicator that some of the big national banks have heard your concerns about unfair overdrafts.

Q: What happened to the debit card as a smart, safe financial tool?

A: The banks pulled a bait and switch by changing their debit card policies.

Debit cards were meant to offer the safety and convenience of a credit card without the danger of going into debt. But millions of Americans have lost money when they were surprised by an overdraft fee – or several –  averaging $34 for debit card purchases which they thought they had the funds to cover.

As recently as 2004, 80 percent of banks and credit unions routinely denied debit card transactions that would have overdrawn their customers' accounts. Many Americans counted on this backstop as they made small, quick purchases, trusting that if their balance fell below zero, their card wouldn't work.

In a complete reversal, today the large majority of customers are enrolled in overdraft programs where debit card and ATM overdrafts are routinely approved, even when their customers don't have the funds.

Q: Why are automatic approvals inappropriate?

A: Denials cost the consumer nothing, approval saves nothing  and is very costly.

The average shortfall triggered by a debit card transaction is $17. So essentially the bank is charging $34 for a $17 loan that will be paid back in just a few days, when the customer makes another deposit. Overdraft fees beget more overdraft fees by putting customers further in the red, which makes future transactions more likely to bounce. Banks and credit unions collect $24 billion per year in unfair overdraft fees, with about half of those triggered by debit card and ATM transactions alone.

Q: Do consumers want automatic approvals?

A: Most do not.

A CRL survey found that 80 percent of consumers would rather have purchases of $5, $20 or $40 denied if it would cost them a $34 fee. The average debit card shortfall is only $17.  But banks are aggressively marketing their product so more consumers will opt in.

Q: Aren’t there new regulations reforming overdraft practices?

A: Yes, but they do not address overdraft abuses effectively.

While Federal Reserve rules now require institutions to get customers' permission before enrolling them in an overdraft system for debit card and ATM transactions, the rules do not address the excessive cost or frequency of the fees institutions can charge once they are in.  Banks are aggressively marketing their highest cost product without regard for the negative impact it has on their customers’ finances.

This rule also fails to stop institutions from manipulating the order in which they post transactions to maximize overdrafts. The FDIC has issued a guidance on this practice of re-ordering, but it only applies to the banks it regulates.