Overdraft Protection Is Costly For Consumers, Study Finds

Bank customers who enlist in protection from overdrafting on their accounts actually fare worse than those who opt out of the so-called “protection” program, according to a new report from the Consumer Financial Protection Bureau.

Overdraft protection is sometimes used by people who don’t have enough money in their accounts to pay a pressing bill or some other emergency cost. In that way, it truly does serve as “protection” — so that a customer’s check doesn’t bounce if he’s short some small amount of money. But, given the rise of debit cards, the “protection” serves as a hidden fee: For years, customers were opted into overdraft programs automatically without their consent. Then, they would swipe their cards at a store, believing they have sufficient funds to withdraw, and face exorbitant fees when the bank credits them an “overdraft” instead of rejecting the card on the spot. In 2010, the CFPB ordered banks to change that process, and now customers must opt in.

The study shows that these overdraft “protection” fees make up a huge amount of the charges that regular bank customers face: In 2011, 61 percent of the total service charges leveled against deposit accounts came from overdrafts.

At the banks that were included in the CFPB’s study, 27 percent of accounts experienced some kind of overdraft fee in 2011, and those totaled on average $225. Worse yet, of those customers who faced such a fee, nearly one third were charged ten or more times for overdrafting. That correlates to earlier studies that found 50 million Americans had overdrawn their accounts in a 12 month period, with 27 million facing fees more than five times.

Banks have tried to spin overdraft protection as a customer “courtesy” and claim that customers are “glad” to have the added protection. But courts don’t agree. In 2011, a district judge ordered Bank of America to pay $410 million to their 13 million customers who faced excessive overdraft fees.