Banks Are Making Billions Off Customers Who Overdraw Their Checking Accounts

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Last year customers lost $11 billion in overdraft fees to their banks, according to a new report from the Consumer Financial Protection Bureau (CFPB).

Consumers trigger overdraft fees whenever they withdraw more money from their accounts than is actually in them. When Congress passed the Dodd-Frank financial reform package in 2010, it included a requirement that banks get their customers’ permission to either authorize transactions that overdraw accounts or to simply decline them upfront.

But banks usually call the first option “overdraft protection,” which customers often think will shield them from charges despite the fact that it will incur fees and fines. Nearly 70 percent of people who opt in say they would rather have a transaction declined than pay a typical fee.

Banks are also offering confusing products. The New York Times reports that they are increasingly offering lines of credit to cover the negative balances when people overdraw their accounts, loans that can be less expensive than a fee if paid off quickly but can add up if not. For example, KeyBank’s credit line has a 15 percent interest rate plus a $30 annual fee, among other costs.

The group of customers that opts in to overdraft protection is quite lucrative for banks. Overdraft charges accounted for about two-thirds of all revenues from all fees on consumer deposits in 2015 and made up 8 percent of banks’ total income, according to the CFPB’s report.

They are also twice as likely to get hit with an overdraft fee in any given year than those who decline to enroll, and they pay more than $20 a month in overdraft fees on average, compared to less than $3 for those who decline. And it’s a small group of profitable people. A previous report found that just 8 percent of accountholders paid three-quarters of all overdraft fees collected. Meanwhile, the median transaction incurring a $35 overdraft fee is just $24.

Some overdraft practices are being reformed. Class action lawsuits dating back to 2009 claimed that banks were using a practice called reordering, or purposefully processing large transactions before smaller ones in order maximize the number of overdraft fees they could charge. The suits resulted in banks paying $1.1 billion in settlements, and the CFPB is working on rules that could limit the practice of reordering, with rules expected to be released later this year.