Consumers who “opt in” for checking-account overdraft protection actually end up with more expenses, according to a study released Tuesday by the Consumer Financial Protection Bureau.
An overdraft can occur when consumers spend or withdraw more money from their checking accounts than is available.
In 2010, federal regulation took effect requiring that banks and credit unions obtain a consumer’s consent before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions.
The CFPB studied previous heavy over-drafters who declined to “opt in” when the new requirements were implemented three years ago.
The agency found that by opting out these account-holders reduced their overdraft or “insufficient funds” fees, on average, by more than $450 in the second half of 2010.
However, consumers who opt in to overdraft protection are more likely to end up with involuntary account closures.
The average consumer who overdrew his or her account paid $225 in overdraft and insufficient funds charges over the course of one year. Among the banks in the study, consumers at some banks paid an average of $298, while consumers at others paid only $147.
Moreover, negative account balances are a significant contributor to involuntary account closures at many banks and credit unions. The CFPB study found that at some banks involuntary closure rates were more than 2.5 times higher for accounts that had opted in to debit and ATM overdraft coverage.
A bank’s complex overdraft policies, procedures, and practices can be very difficult for a consumer to understand, the CFPB found.
This is true for consumers who have opted in. It is also true for those who have not, but are trying to figure out their potential costs in using their bank’s services.
These complexities include:
- Complex transaction postings: The order in which transactions are posted to an account can influence the number of transactions that incur an overdraft fee. The study found wide variation in posting practices, from institutions debiting transactions at periodic intervals throughout the day to debiting them in nightly batches. Banks also differ in how they combine, sort, or order the transactions.
- Overdraft coverage limits that often depend on many factors: The overdraft coverage limit is the amount of money the institution is willing to advance to an account-holder when his or her funds are insufficient to cover a pending payment. Some institutions have limits of fixed amounts, others vary limits based on the account-holder’s individual circumstances, such as his or her deposit patterns. Smaller limits reduce the opportunities for overdraft but can result in more non-sufficient fund fees. Higher limits can result in more overdraft fees because the consumer may keep drawing from his or her account.
- Complicated fee structures that are not standardized: Institutions have different fee structures when it comes to capping the number of overdrafts that can be incurred in a single day. Some banks, for example, limit the number of overdraft charges in a day to two; other banks have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fees in a day. Similarly, some banks will not charge an overdraft fee for any item that overdraws the account by less than $5 while other banks charge fees on every overdraft transaction regardless of size.
Read the CFPB’s full report on overdraft practices.