A recent Pew report noted that the continuous increase in the amount and frequency of overdraft fees over the past several decades has disproportionately affected consumers commonly referred to as “financially vulnerable.” The report offered advice on how financial institutions can help to curb this trend.
Research included in a Consumer Financial Protection Bureau (CFPB) study from 2014 on checking account overdrafts indicated that less than one-fifth of all account holders pay 90 percent of all overdraft fees triggered by debit cards, checks and automated clearinghouse (ACH) electronic transactions. Such consumers, on average, incur three overdraft fees per year. Approximately two-thirds of all consumers said they would prefer to have a payment declined rather than pay an overdraft fee, according to the report, which also considered past survey data.
The Pew Charitable Trusts’ chartbook, “Heavy Overdrafters: A Financial Profile,” shows that “consumers who pay more than $100 in overdraft and nonsufficient funds (NSF) fees in a year, generally have incomes below the U.S. average, and overdraft fees consumed nearly a full week’s worth of their household incomes on average during the past year.”
Banks charge consumers overdraft fees, among other charges, as a means of generating revenue on checking accounts. The report examined data compiled by the Federal Deposit Insurance Corp., from 1984 to 2015, including overdraft fee revenues, fee schedules, account agreements and supplemental disclosures from 44 of the country’s 50 largest. This data showed that the banking industry’s total revenue from such fees peaked in 2009 at more than $46 billion before declining to roughly $34 billion in 2013 and 2014. In 2015, that amount increased to roughly $35 billion.
The report found that service charges on deposit accounts, including overdraft and NSF fees, more than doubled during the 1984 to 2015 timeframe and income from interest has decreased in recent years. It also found that, in addition to mostly charging overdraft fees of $35 or more, many of the largest banks in the U.S. with consumer checking accounts do not meet Pew’s recommended best practices for overdraft programs and more than 40 percent process transactions from largest to smallest by dollar amount, which can reduce the account balance more quickly and result in more overdrafts than other methods, such as posting transactions chronologically, and nearly 80 percent allow overdrafts on ATM and debit point-of-sale (POS) transactions.
“To limit the negative financial impact of overdraft fees on the account holders who incur them the most,Pew urges regulators to ensure that overdraft programs are transparent and designed only for infrequent and accidental occurrences,” the report states.
To accomplish the aforementioned goals, the report recommends financial institutions consider the following recommendations:
- Allow banks and credit unions to replace expensive overdraft penalty programs with affordable small-dollar loans;
- Make overdraft penalty fees reasonable and proportional to the costs associated with providing overdraft loans or with the overdraft amount;
- Allow financial institutions to charge customers no more than six overdraft fees during any 12-month period and limit overdraft fees to one per negative-balance episode;
- Prohibit banks and credit unions from maximizing overdraft fees when posting deposits and withdrawals; and
- Require financial institutions to provide account holders clear, comprehensive terms and pricing information for all available overdraft options.
The report also recommended that regulators prohibit banks and credit unions from using “extended overdraft fees” during instances where customers fail to repay a negative balance within a designated time period, occurrences that are especially harmful to financially vulnerable consumers.
“[Fifty-two] percent of the banks in this study still charge such additional fees,” the report states. “Among the banks examined for this study, the median period before incurring an extended overdraft fee was five days, and the median fee amount was $20. Previous Pew research found that almost 20 percent of overdrafters have paid an extended fee.”