Overdraft service, once an occasional courtesy provided to bank customers, is now a high-cost service that pushes many consumers out of the banking system completely, writes Susan Weinstock of The Pew Charitable Trusts. The penalties when customers spend more than what is in their account average $225 per year, she reports.
The Federal Reserve Board in 2010 implemented new rules requiring consumers to opt into debit-card overdraft service, but Weinstock points out that the policy does not spell out the options for overdraft or make clear that consumers who do not opt in will avoid high overdraft fees. A May 2012 survey by The Pew Charitable Trusts found that 54 percent of consumers did not realize they had opted in to overdraft protection. Greater than two-thirds of survey respondents believe the service mostly hurts consumers rather than helps them.
A Consumer Financial Protection Bureau (CFPB) white paper found that consumers who opt in pay higher account fees and experience more involuntary account closures than those who do not. Pew's survey of consumers who had overdrawn their bank accounts with debit cards found that almost 75 percent incurred a costly overdraft penalty fee. Research shows that most consumers have other options, including a less-expensive overdraft transfer service that links their checking account to a savings account. Pew has called for the CFPB to write new rules on overdraft service, which ideally would prohibit transaction reordering that maximizes overdraft fees, would require banks to post deposits and withdrawals in a fully disclosed and neutral manner, and would require that overdraft penalty fees be "reasonable and proportional to the financial institution's costs in providing the overdraft loan," Weinstock says. The rules also should require banks to provide clear, comprehensive terms and pricing for all available overdraft options.