Overdraft Fees Still a Big Payday for Financial Institutions

Washington, DC Despite rules meant to curb excessive overdraft fees, according to information from the Federal Deposit Insurance Corporation (FDIC), some consumers are still having a difficult time getting out of overdraft, given the high fees charged for each overdraft transaction. According to the FDIC report (as cited by The Washington Post; 6/13/16), the approximately 600 banks included in the data collected $2.7 billion in overdraft fees in the first quarter.

In 2010, financial institutions were ordered to obtain consent before customers could be charged overdraft fees for ATM and debit card transactions. Prior to that, customers who attempted to make a debit purchase or withdrawal that exceeded the amount in their account could have the transaction approved automatically, but they were charged an overdraft fee of up to $35 for doing so, even if they had not authorized an overdraft on the account.

Even with the changes in 2010, however, banks still manage to profit heavily off overdraft transaction fees. A 2014 report from the Consumer Financial Protection Bureau highlights how drastically overdraft fees can affect a bank account. According to that report, eight percent of bank customers incur almost 75 percent of all overdraft fees. Meanwhile, the median amount that leads to debit transaction overdraft fees is only $24, meaning a $35 overdraft fee would more than double the amount the cardholder pays.

The same report notes that for customers who opt in to the overdraft protection, overdraft fees average more than $250 a year and account for almost 75 percent of their account fees.

And although banks have to obtain the customer’s authorization to opt in to overdraft protection, there is still no official ban on the reordering of bank transactions. This means some banks are still able to process larger transactions before smaller ones, even if the smaller transactions occurred first, chronologically. This reordering can push consumers into overdraft more quickly, increasing the number of overdraft fees they pay.

Some financial institutions faced lawsuits alleging the reordering of transactions violated their client agreements.

Credit unions have also been criticized for their overdraft fees. One woman in Pennsylvania reportedly faced massive overdraft fees after a child used her mobile device to make purchases without permission. According to WBRE (5/31/16), Mary Popovich was charged an overdraft fee for each of the transactions, even though Amazon refunded the purchases. She wound up owing her credit union almost $900.

The credit union is reportedly working with her to resolve the issues.