An estimated 45% of the country’s banks make more from overdraft fees than they do from credit card fees(!). They will generate $27 billion in covering overdrafts on checking accounts this year. Proposed legislation, however, may at least put in dent in that healthy source of bank revenue.
A 2008 FDIC study estimates that 41% of banks have automated overdraft programs, and a robust 77% of large banks have such programs. The FDIC also estimates that 93% of overdraft charges come from 14% of bank customers.
Some banks have also come under fire for manipulating the chronological order of withdrawals to ensure there are multiple penalties. For example, a customer has $10 in their account, and makes purchases of $3, $4, and $26. If the bank processes the purchases in true chronological order, there should only be an overdraft fee for the final purchase. But if the $26 purchase is processed first, the customer gets tagged three times. It’s just plain shady.
Interested in keeping their cash cows, banks will fight tooth and nail against any proposed legislation. The Federal Reserve is considering requiring banks to get permission from customers before enrolling them in an overdraft program. My guess, however, is that this will do little to stop the chronic 13% of overdrafters from racking up these fees. In addition, the proposed legislation does little to fix the ridiculous inequity of getting charged a $26-$32 overdraft fee for overdrawing by 25 cents.
Overspending on Debit Cards is a Boon for Banks | NY Times
(photo: Great Beyond)
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What happens when another company’s error triggers these overdrafts? My mom struggles to maintain her checking account. She knows that Verizon always takes around $40 at the beginning of the month to pay her phone bill. One month, Verizon screws up her bill and charges her $250. This rogue charge leads to over $300 in overdraft fees being charged to my mom’s account due to all the other small charges that went through on the same day before she noticed this error. Verizon acknowledge the error, but the best they will do is to credit her account for the $210 difference. They aren’t going to pay for her overdraft fees and the bank sure as heck isn’t going to waive them. That’s $300 she has to pay from her own paycheck now, sending her into a spiral of similar charges and overdrafts for the next several months. For someone living off of Social Security, it’s nearly impossible to climb out of that hole once it’s been dug.
Consider suing them in small claims court. That would probably get their attention.
It would seem that any smart consumer who has an overdraft would obtain overdraft protection by opening a $100 checking account with their bank. If there is an overdraft, the funds flow from the savings to the checking.
Most banks also charge for using overdraft protection from a linked savings account.
some of those fees are ridiculous. My son got in over his head becasue of them. For a very small overdraft of less than $10.00 and only for a few hours he ends up paying $43 that he doesn’t have.
Thankfully, some banks are reforming their overdraft policies for debit card transactions (look for a new post soon).