If you've been paying attention to banking critics in recent years - including consumer advocacy groups and the Pew Charitable Trusts - the latest news from the Consumer Financial Protection Bureau will hardly be a shocker: A white paper made public Tuesday shows that U.S. banks have become heavily reliant on overdraft and non-sufficient-funds charges, and that a small portion of errant customers are paying the bulk of the bills. In 2011, those two kinds of fees - once considered "nuisance charges" imposed to deter bad behavior - generated about 60 percent of total fees collected on consumers' checking accounts.
You can find the report, a 72-page white paper based on a year-long study of how overdraft fees play out in the marketplace, here. Beyond the many data points it discusses, the report plainly reflects regulators' doubts that the Federal Reserve's three-year-old "opt in" rule does enough to reduce consumers' risks from overdraft fees - doubts, to be sure, that were already evident in February 2012 when the CFPB announced the study.
Opt-in rates vary dramatically, below 10 percent at some banks and above 40 percent at others, which CFPB Director Richard Cordray said raised questions about how the plans are pitched. He said a key concern was that plans presented as offering "protection" to customers "may actually be putting consumers at greater risk of harm.”
Reliance on overdraft fees reflects a sea change in consumer banking, where there was once a bright line between checking products and credit products. The change happened when bankers came to realize - with the help of industry consultants - that there was gold in blurring the line, and that automated systems could essentially extend small amounts of credit via a debit card.
All of a sudden, transactions at bank machines or in checkout lines weren't being declined when consumers' withdrawals or purchases would dip their accounts into the red. Instead, they were being approved in return for a $30 or $35 overdraft fee, with banks insisting they were extending an old-fashioned "courtesy" rather than credit. With debit cards often used for small purchases, and banks clearing larger debits or checks before smaller ones, some customers were dismayed to find that a single mistake could generate hundreds of dollars in fees. Others discovered the special pain of buying "the $40 hoagie" or the "$38 cup of Starbucks."
The opt-in rule was designed to change that, by ensuring that account-holders would only be exposed to the fees knowingly. In a press briefing Monday, Cordray said that while the new rules appeared to have helped some consumers, confusion lingered for others because of the complexity of bank practices:
For example, banks follow a variety of different approaches about how and when they post transactions for determining whether there is an overdraft. Some process larger transactions first; others process certain types of transactions first. Some, but not all, have daily caps on the number of overdraft and NSF fees that will be imposed, and the caps may be set at different levels, up to 12 per day. Some charge no overdraft fees on items under a certain amount (say, for example, a transaction of $5 or less); others do not charge if the total amount of the net overdraft at the end of the day is under a certain amount. At still other institutions, if you miss by as little as a penny, you may incur a hefty overdraft fee. Predicting or planning around these results can be highly complex.
In addition, it is not always clear to a consumer what day a particular check, or even a debit card transaction, will be posted. When an institution processes items that exceed the available funds in an account, the consumer may get hit with one overdraft charge or many charges. It depends on the varying parts of the machinery that makes up that institution’s overdraft program and deposit systems as well as the varying parts of the machinery that make up the overall transaction processing system in the United States. This makes it very difficult for consumers to understand, anticipate, and avoid costs.
It's not clear where this is heading. Pew, for instance, has been pushing for banks to adopt a voluntary set of best practices to reduce the needless financial risks from checking accounts, and recently reported mixed progress toward that goal.
But one likely outcome - probably an unwelcome one to some consumers - is that banks will try to recoup some lost income by seeking larger monthly service fees from smaller, less-profitable depositors - as my colleague Michael Armstrong reports Tuesday that PNC is doing by phasing out "free checking" for customers who don't maintain a high enough balance.
If you don't need the large ATM networks and other services offered by the largest banks, you might want to consider shifting your accounts to a smaller bank or a credit union. But look carefully at the fee structure before you make such a switch - not all small banks and credit unions are equally consumer friendly.
And, if you haven't already, just say no when your bank asks you to accept its "standard overdraft practices." There are often better options - the same banks may even offer similar, less-expensive overdraft protection via a line of credit, for instance. And there are very few alternatives that are more costly than overdraft fees.