Despite its name, signing up for “overdraft protection” with your checking account leaves banking customers far more likely to pay overdraft fees, according to a new study of the policies by the Consumer Financial Protection Bureau (CFPB). At about $34 a pop, those charges are typically larger than the purchase that overdrafted the account in the first place.
New rules instituted four years ago require banks to get customer permission to authorize transactions that overdraw the funds in the customer’s account. Once an accountholder opts in to the “overdraft protection” system, the bank will authorize overdrafts and assess a penalty after the fact. Such opt-in accountholders are nearly twice as likely to get hit with an overdraft fee in a given year than those who decline overdraft protection, the CFPB found. Opt-in accounts are more than twice as likely to pay four or more overdraft fees in a year, and three times as likely to pay 11 or more such penalties each year.
Opt-in accounts pay an average of $21.61 per month in overdraft fees, compared to $2.98 per month on average for those who decline the “protection” banks offer. (Roughly one in four who decline the protection still find a way to overdraft at least once a year, typically through automatic debit transactions used to pay recurring bills. Banks authorize those auto-pay transactions for all users regardless of their opt-in status.) Just 8 percent of accountholders pay three-quarters of the total overdraft fees that banks collect.
The odds of getting hit with overdraft fees are highest for those who use their debit cards at least once per day. The median debit card transaction that incurs a $35 overdraft fee is just $24 dollars.
CFPB director Richard Cordray decried the fees in an email to Bloomberg. “Overdraft fees should not be ‘gotchas’ when people use their debit cards,” Cordray wrote, assing that “opting in for overdraft coverage for debit card and ATM transactions is an expensive way to manage a checking account.” Research from the Pew Charitable Trusts backs up the notion that banking customers don’t know that they’re opting in to a system that will cost them money rather than protect them from overdrawing their account.
The CFPB based its findings on an analysis of roughly 2 million separate checking accounts at large banks. The data are stripped of all identifying information before being handed over to the agency. Republicans in Congress who don’t like the CFPB have mischaracterized these kinds of data collection and analytic projects as spying on Americans, and even likened the agency’s work to Gestapo surveillance in Nazi Germany.
The banks themselves take a milder tack in responding to the CFPB’s suggestion that overdraft protection is a damaging and disingenuous revenue-making scheme rather than the valuable service its name suggests. “We believe overdraft protection is a vital banking service voluntarily chosen by consumers to ensure their financial needs are met,” Consumer Bankers Association president and CEO Richard Hunt said in a statement to the Associated Press.
Hunt may be right that customers who overdraft — even chronically — are doing so with eyes wide open. The CFPB report itself notes that it cannot determine the cause of the correlation between “opt-in” accounts and massive overdraft fees, and calls for further research on that question.
But the correlation alone is enough to make one thing clear: “overdraft protection” only protects a person from the embarrassment of having her card declined at the register. It doesn’t protect her money from a banking industry that rakes in $31.9 billion per year in overdraft charges.