Large Banks Not Following Best Overdraft Practices
Many of the largest U.S. banks are charging high, and often multiple, fees when customers incur overdrafts, according to research released today from The Pew Charitable Trust. In addition, more than two in five banks are rearranging transactions so that these overdraft fees are maximized.
In Pew’s new reports, “Consumers Need Protection From Excessive Overdraft Costs” and “How a Set of Small Banks Compares on Overdraft,” the organization revealed things are no better at small banks, where overdraft programs are similar to those at larger banks.
Pew compiled their results based on disclosures from the 50 largest U.S. banks, and found:
- Service charges, including nonsufficient funds and overdraft fees, have more than doubled in the past three decades, while interest income has decreased.
- Most banks charge at least $35 each time an overdraft is incurred.
Many banks are failing to meet Pew’s recommended best practices for overdraft programs. More than 40% of banks are processing transactions from the largest to smallest dollar amount, which reduces a bank balance more quickly and could result in additional overdrafts. Nearly 80% allow overdrafts on ATMs and point-of-sale transactions.
Pew found many customers do not remember opting in to overdraft coverage, and most said they would rather have a transaction declined than pay the high overdraft penalties. Unfortunately, the most financially vulnerable Americans are often the ones paying the largest amount in overdraft fees, and these of fees essentially become an expensive form of credit.
Pew also analyzed practices at 45 small banks across the country. The research found these banks generally offer fee-based overdraft programs which charge customers $28 to $36 per occurrence and allow customers to rack up multiple fees per day. Small banks differ from their larger counterparts in one way, though. They rarely engage in transaction reordering–a common practice at large banks.
Other key findings on this small bank study include:
- 42 of the 45 banks allowed customers to overdraw their accounts at ATMs or at point-of-sale transactions instead of declining the card. They allow customers to opt in to an overdraft service, which costs an average of $32.
- All of the banks studied allow their customers to run up $90 in fees per day for overdrafts, and many allow even higher daily totals.
- Only two of the banks disclosed to customers that they reorder transactions from highest to lowest dollar amount. The other banks either do not disclose their policies, or say they post transactions in a neutral manner or from lowest to highest dollar amount.
- 20 of the banks disclose a limit on the amount of credit available to cover fees and overdrafts. The median is $500.
- Nearly all (40) of the banks either do not disclose monthly fees or disclose one of two policies. They either do not charge a monthly checking account fee or they waive the fee if the customer agrees to electronic statements. Only five banks charge a monthly fee that cannot be waived.
To limit the negative impact of overdraft fees, Pew recommends that regulators revise federal rules by:
- Enabling banks and credit unions to offer affordable, small loans in lieu of expensive overdraft penalties.
- Making overdraft fees more reasonable and proportional to the bank’s costs in providing the overdraft loan.
- Limiting financial institutions to charging customers six overdraft fees in a 12-month period, and limiting fees to one fee per episode.
- Prohibiting financial institutions from maximizing overdraft fees when posting withdrawals and deposits.
- Requiring banks and credit unions to provide customers with clear terms and pricing information regarding overdraft options.
“The prevalence of fee-based overdraft programs at both large and small banks underscores the need for new policies to prevent ‘courtesy’ overdraft programs from being costly and unsustainable forms of short-term credit for many financially vulnerable consumers,” said Nick Bourke, director of Pew’s consumer finance project. “Regulators should set reasonable limits on overdraft fees and help banks create new small-credit options for those who want them.”