It’s difficult for consumers to anticipate and avoid overdraft costs on their checking accounts.
Those are the findings of a report by the Consumer Financial Protection Bureau, which found wide variations across financial institutions when it comes to the costs and risks of opting in to overdraft coverage on debit card transactions and ATM withdrawals.
The report also found that consumers who opt in for overdraft coverage end up with higher account fees and more involuntary account closures than consumers who don’t opt in.
“What is marketed as overdraft protection can, in some instances, create greater risk of consumer harm,” said Richard Cordray, director of the bureau.
When consumers try to withdraw more money from their checking accounts than is available, the financial institution can reject the transaction. For some transactions, such as checks, the institution usually charges a non-sufficient funds fee. The financial institution can also choose to cover the payment by advancing funds on the consumer’s behalf, and often charges an overdraft fee for the service.
Most financial institutions have automated systems for handling overdrafts. The systems have contributed to the evolution of overdraft from an occasional courtesy to a significant source of industry revenues, said Cordray. The bureau estimates that overdraft and non-sufficient funds fees make up 60 percent or more of the fee income on consumer checking accounts.
Over the past decade, federal regulators have taken steps to improve overdraft practices. The bureau’s report will provide the basis to develop more uniform treatment of these issues across financial institutions, he said.
The report is based on data from large banks supervised by the bureau, other research, and information from consumers.
Findings from the report are:
Opting-in puts consumers at greater risk
In 2010, a new federal government regulation took effect requiring that financial institutions obtain a consumer’s consent or opt-in before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions.
- Consumers who opt in end up paying higher fees.
- Consumers who opt in to overdraft coverage are more likely to end up with involuntary account closures.
Overdraft practices are highly complex for consumers
The bureau’s report raises questions about the ability of consumers to anticipate and avoid overdraft costs. Each institution’s overdraft policies, procedures, and practices are highly complex and can be difficult for a consumer to navigate, yet greatly affect whether and how often they’ll incur overdraft fees. The complexities include:
- Complicated fee structures.
- Overdraft coverage limits often depend on many factors.
- Complex transaction postings.
Costs and risks vary by institution
The different overdraft policies, procedures, and practices lead to different outcomes for consumers at different financial institutions. This raises questions about some overdraft practices that can be difficult for consumers to navigate. The bureau’s report found:
- Average annual overdraft charges vary among institutions, with some consumers paying an average of $298 of a year while other consumers at others paid $147.
- Involuntary account closures vary widely.
The bureau offers a factsheet for more information on overdraft practices.
The bureau plans to review account-level data – which won’t contain consumers’ personally identifiable information – to look at how differences in practices affect consumers.