Imagine that you have exhausted your checking account at the mall when you swing by the coffee shop for some reviving caffeine. Would you prefer the bank to: a) decline the purchase on your debit card so that you can pay cash, or b) pay for that coffee and then slam you with a $35 overdraft penalty. We know what we would answer.
Until two years ago, the nation’s banks could automatically enroll customers in overdraft programs — the result was tens of billions of dollars in overdraft fees. The Federal Reserve finally stepped in, requiring banks to get the customer’s consent before enrolling them. But it should have done more: requiring reasonable, and proportional penalties; and pressing banks to develop ways of alerting debit card users before they overdraw.
Overdraft revenue, estimated to have been as high as $37 billion annually, has dropped by about 15 percent, according to one estimate. The banks are not giving up.
According to a 2011 study by The Center for Responsible Lending, a research group, many banks fail to fully explain their overdraft policies and some have bullied customers into opting in, warning that “your debit card may not work the same way anymore.” A new survey by The Pew Charitable Trusts Safe Checking Project found that more than half of customers with overdraft “protection” did not believe that they had opted into the coverage.
The federal Consumer Financial Protection Bureau has a vital role to play. It should require financial institutions to clearly explain their overdraft programs and include complete pricing information about different overdraft options. The bureau should also require fees to be reasonable and proportional to the amount of the overdraft, and the actual costs to the banks.
According to the Pew study, 75 percent of people who have been hit with overdraft fees say they would prefer the bank to decline transactions when their accounts are empty. If the banks are playing by the rules, all customers should know that the easiest way to avoid overdraft fees is not to opt into the program.
