Federal regulators announced a new investigation into bank overdraft fees last week, which could lead to new regulations aimed at helping consumers avoid paying such fees. The Consumer Financial Protection Bureau is especially concerned that a small group of mostly young and low-income consumers pay the vast majority of overdraft fees.
Only nine percent of checking account customers pay 84 percent of all overdraft fees, and they are the people least able to afford such fees, according to a press release by the agency.
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“We know that these consumers are largely drawn from the ranks of the low-income,” Richard Cordray, the bureau’s director, said in a speech Tuesday at Hunter College in New York City, where he compared overdraft fees to costly payday loans.
Banks charge overdraft fees when a customer tries to withdraw more money than she has in her account. Originally such fees were charged as a disincentive to prevent overdrafts, but by the 1990s many banks came to rely on revenue from such fees as a source of profits. The average fee is now $30 to $35, and has increased 17 percent over the last five years, according to the bureau.
As fee revenue increased, many banks found creative ways to charge more. One is called transaction re-ordering. Instead of processing checks and purchases chronologically, as they happen, some banks wait a period of time, often a day. Then they process all the transactions from that day from highest dollar amount to lowest.
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The practice assures that important bills like mortgages and car payments get paid first, Cordray said. But it also increases the chance that consumers will overdraw their account early, and then rack up additional fees every time they buy smaller things like gum.
“We have heard many stories about the $40 cup of coffee: a man swipes a debit card at his local coffee shop, and unbeknownst to him, his balance is too low to cover the cost,” Cordray said. ”Rather than the card being declined (with the result that he either pays in cash or goes uncaffeinated), the small transaction is processed—along with a $35 overdraft fee.”
The bureau also is concerned about banks sending out misleading marketing materials that extoll the values of overdraft protection (such as not getting denied at the cash register when going to make a purchase), but fail to explain all the costs.
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“They may have been misled by marketing materials that suggested opting in to overdraft protection was necessary if they wanted to continue to use their debit card,” Cordray said.
Right now, the bureau is simply asking banks for information on their overdraft fee programs. But it may eventually use its findings to require a new penalty fee box, similar to the Schumer Box on credit card promotions, that would disclose how much money consumers pay in overdraft fees each month. You can see the bureau’s prototype for such a box by clicking here.
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