Heavy Overdrafters are the Most Financially Vulnerable Americans
A new report from The Pew Charitable Trusts’ consumer banking project has found that the most vulnerable consumers are the ones who most often overdraft their account.
In 2015, Pew surveyed “heavy overdrafters,” banking customers who incur over $100 in overdraft and nonsufficient fund fees each year. Since the average fee at most U.S. banks (84% of the largest) is $35, this represents about three overdrafts each year.
The Consumer Financial Protection Bureau (CFPB) found the median transaction amount for purchases that generated this fee was only $50 and, for debit cards, only $24, which means many consumers paid more in fees than they did for their product. Their research also found that 18% of banking customers are paying the vast majority (91%) of these overdraft fees.
These expenditures are causing some of the most financially vulnerable Americans to leave the banking system entirely. 31% of people without a bank account said “high or unpredictable fees” was one the reasons they do not have a bank account. In fact, 13% said these fees were the primary reason they don’t have an account. Customers view these fees as “unpredictable” because they often do not learn of the overdraft for two or more days.
More than two-thirds of the respondents said they would rather have had their transaction declined than incur the $35 fee.
The survey also found that most heavy overdrafters are:
- Millennials or GenXers
- Renters instead of homeowners
- Below-average income earners (under $50,000 per year)
It seems as if many of these overdrafters are using overdraft fees as an “expensive form of credit” instead of the “occasional courtesy” for which they were intended.
Pew is asking the CFPB to consider new rules that would ensure overdraft programs are designed for infrequent or accidental occurrences. Some of these changes include:
- Making overdraft fees reasonable and proportional to the overdraft amount or the institution’s actual cost for providing the overdraft loan.
- Allowing financial institutions to charge customers only six small overdraft fees in a one-year period. If a customer goes over this limit, the bank should extend them credit under the current rules that govern other types of credit. Pew believes this could save heavy overdrafters more than $210 annually.
- Prohibiting financial institutions from “maximizing” overdraft fees, where transactions are reordered from the highest to the lowest, which causes accounts to be overdrawn more quickly.