Bank Overdraft Fees on the Rise

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They’re euphemistically called “courtesy overdraft” fees, and banks are jacking them up. The charges consumers incur when they overdraw their bank accounts are up 4 percent this year, according to research firm Moebs Services.

That’s the first time overdraft fees have risen during a recession since the firm started collecting the data in the late-1980s. This year U.S. banks are on pace to generate a record $38.5 billion in such fees.

Banks contend that consumers willingly pay for overdraft protection. They also say it’s customers’ responsibility to make sure they have enough cash in their accounts.

Fair enough. But the concern with overdraft fees isn’t only that they’re rising to what critics say are unreasonable levels — it’s that consumers often don’t know when they’re in danger of getting hit with them. Most banks that provide overdraft services for ATM and point-of-sale transactions notify customers that they lack the funds to cover a withdrawal or purchase only after the deed is done, says the FDIC. Only eight percent of banks warn customers that they risk overdrawing their accounts for a POS/debit transaction, giving them a chance to cancel the purchase and avoid a fee, while roughly 24 percent of banks inform ATM users that they’re short of funds.

Other findings from the Moebs survey, which looked at 2,000 commercial banks, savings institutions and credit unions:

Wall Street banks charged the highest overdraft fees, with a median price of $35 per incident, compared with $26 for all financial institutions
35 percent of all financial institutions let customers overdraw their accounts at an ATM or with a debit card, charging a median of $26 for the service
Banks in the U.S. South had the highest OD charges in the nation, with a median charge per incident of $29, compared with $25 in the rest of the country
The U.S. Postal Service recently raised its OD fees to $35 per item
In 2009, 54 percent of all financial institutions offered OD services, down from 69 percent in 2008

Tags: Bank, Fee, Financial Services, Alain Sherter

Alain Sherter is an award-winning business journalist who has written for The Deal and Thomson Financial Media.

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1

jrwells2

08/14/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

Alain,

Glad to see you reporting on this deplorable activity of the nation's banking industry. Back in the days when banking was a respectable business, this practice would have caused a banker to be ridden out of town on a rail.

However, not only does the Federal Reserve allow this practice to continue, but it has chosen to regulate these short-term credit extensions under the Truth in Savings Act, rather than the Truth in Lending Act, specifically to allow banks to escape responsibility for disclosing the grossly unfair rates at which these "courtesies" are being extended.

According to the FDIC's own research, if banks cover a $20 purchase and charge a $27 fee, the loan has a 3,520%
APR if paid back in two weeks. Yet the agency has done absolutely nothing to stop the practice.

Meanwhile, all the federal regulatory agencies condemn so-called Payday Loans with APRs of less than 500%.

But then, these are the same regulators which ignored banks' questionable mortgage practices which ultimately grew into the current economic crisis.

Please keep the focus on this abusive and anti-consumer practice. Jim
2

Alain Sherter

08/14/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

Jim--No question, lax, and arguably even complicit, regulation has allowed the banks to get away with sticking consumers with usurious fees. As you suggest, it remains to be seen if current regulatory concerns with mortgage lending will extend to tighter scrutiny of other financial products, such as credit cards.

Thanks for reading.

Alain
3

Slitke

09/03/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

While I am off the camp that beleives the best way to avoid an overdraft fee is by not overdrawing your account, I can see instances where this has gone a bit South of my moral equator.

There are new regulations, yes under Truth-in-savings that will be effective January 2010 to help make it easier for consumers to know when they're hitting those OD fees. Many community banks have been following the high road for a while and won't need to initiate many changes, but I imagine for a few sneaky institutions it'll be an eye opener for their customers.

More proposed regulations are on their way, this time under Reg E, to make sure consumers have the ability to opt out of those transactions.

And you're right Jim, back in the day these courtesies were extended based on knowing your customer and a verbal understanding the money would be paid back.

I also find it interesting that this was never an issue when banks charged the same fees for returning the check, leaving the consumer to explain to the electric company why their check bounced and possibly having to deal with shut off services. Now the banks charge the same fee for covering the check, and its usuary. Go figure.

Stacy
4

cirulism

09/28/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

People may willingly sign up for overdraft protection, but not if they know the bank charges its standard overdraft fee on the SMALLEST items each day which overdraw an account. For example, say you overdraw your account by $50 one day, with a single item of $200. Instead of charging you for a single item, they will "pay" that item and charge you for each $5, $10, $20 item, etc. Instead of a single overdraft fee of $35, the bank charges multiple fees for each item until it has reached the maximum number of items which total the overdraft amount of $50. Hence, a $50 overdraft in the example above could now cost, with recent "big bank" adjustments, $35 x 4 = $140 in a single day for a $50 overdraft!
This is what is "scandalous" about the practice, not the fact that some unsuspecting account holder might not know he or he has overdraft "protection." We need protection from our "protectors"!!
5

jerang@...

10/12/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

I can't stand it any longer ... money is going under the bed now!
6

investingRookie

10/22/09 | Report as spam

RE: Bank Overdraft Fees on the Rise

@jerang the banks were designed to feed off the middle class!