“The Secrets of Overdraft: How Banks are Making Billions on Our Small Dollar Mistakes.”
Using newly published federal data, I show that banks are on pace to generate more than $10 billion in overdraft fees from consumer transaction accounts.
Consumers are unwittingly being ensnared into paying billions in overdraft fees every year, and often the reason is because their banks have designed aggressive products. These results are a product of a system that puts the interests of banks ahead of consumers by methods that are often deceptive.
Just in time for the release of the movie The Big Short, I offer up this view into how banks are also making billions through scores of little shorts. However, instead of shorting against investment bankers and pension funds, retail banks are finding ways to extract millions of dollars every hour from the pockets of American households. Is the Big Short the big problem, or should we be more concerned about all of these little shorts?
A key finding is that banks can design their overdraft products to increase consumer expense. There is considerable variation in how banks construct their overdraft programs. This is not reflective of consumer choice, but rather because of the greatheterogeneity in the makeup of account terms and conditions as well as gaps in consumer understanding of opt‐in rules.
A fact sheet included alongside the report lists the 15 largest recipients of overdraft fees. JPMorgan Chase, Bank of America, and Wells Fargo collected more than $2 billion in overdraft fees during the first six months of 2015.
A second fact sheet controls for consumer‐related deposit account sizes.
Few consumers understand how overdraft works. In our surveys of consumers, Reinvestment Partners found that most did not know that they could receive an overdraft fee even if they never explicitly opted-in for an overdraft service. They were not aware that opt-in rules only cover overages at non-recurring debit card purchases and ATM withdrawals. Checks and ACH transactions can still trigger an overage. After that, it is up to the discretion of the bank to cover the payment and potentially to charge an overdraft fee.
Moreover, it was difficult to imagine how many could not be confused by the incredible complexity of overdraft. There is hardly a case of an approach to overdraft that is the same at any two banks. Banks differ in the number of fees they will charge in a single day, if they offer a courtesy overage (and for how much), if they have an extended overdraft fee, and if they charge for overages at ATMs and the point-of-sale.
The new FFIEC data makes it possible to see how banks differ in the degree to which they generate overdraft fees. In turn, we have to assume that this means that some banks are deciding to pursue and provoke overdraft events.
Personal narratives supplied by consumers and then published in the Consumer Financial Protection Bureau's Consumer Complaint Database is used to provide anecdotal evidence of customer confusion.
Here is one account of how overdraft undermined the essential security of one family:
They continue to take money from my account. I have had $930 taken in past 2 weeks. I have had XXXX $36 fees ($140) totaling $540 just on the same XXXX checks. These fees include a $36 overdraft fee and a $36 return check fee on XXXX separate occasions. They attempted to put the check back through when there was no money to cover them. I have an automatic deposit each week. I looked and the deposit went the through last night for this week and the next day my card was declined. They fabricated XXXX overdraft fees of $140 which made my account negative by $88. The account would not be negative if not for these fees. I cannot pay my utilities. I have children and cannot afford food, electric, or water.