Consumers whose checking accounts are running low generally have two options: Don’t pay for anything using the depleted account, or get a short-term cash infusion from the bank in the form of an overdraft loan. The price, of course, is the associated fee. A new report from the Consumer Financial Protection Bureau, based on account and transaction data provided by banks, gives details on how those people who choose to take the fee end up paying a lot for the overdraft cushion.
The new data show that the transactions that actually put people over the limit aren’t that large. Most of those who overdraft do so on debit cards and on purchases of less than $24.
When people do overdraw their accounts, more than half typically repay the funds within three days. Three-quarters do so within a week.
According to the CFPB, if someone were to pay $34 in fees to borrow $24 for three days, the loan would be at a 17,000 percent annual percentage rate. You could argue that if anything, this understates the problem. The study found that when people overdraw their accounts with a debit card, they typically are short 61.3 percent of the transaction. That means the amount they “borrow” is actually more like $14.71, which in turn would be more like a 28,121 percent APR. In any case, not cheap.
A 2009 law required banks to allow overdrafting on debit cards and ATM withdraws only for people who opt in to the service, and about one in five checking account users have since opted in. Banks have said that overdrafting provides a valuable service that lets people make crucial payments such as rent and utilities that consumers don’t want to miss. But the CFPB found that “8 percent of customers incur nearly 75 percent of all overdraft fees.”
Overdrafting fees make up more than half of all checking account fees charged each month—which means that to some degree the concentrated group of people who overdraw again and again are subsidizing free or low-cost checking for others. Some banks have stopped offering overdraft service entirely, but many, especially smaller banks, continue to depend on the revenue.
In a statement, the Consumer Bankers Association said the services “are completely optional” and provide an alternative to other short-term credit providers “outside the heavily regulated banking system,” such as payday lenders.
CFPB Director Richard Cordray says the bureau does think banks and credit unions should be able to offer overdraft coverage, but that these and other research findings aim to figure out how the programs are affecting consumers. Since overdrafts require an opt-in, the bureau’s question will be what—if anything—regulators can do to help prevent people from getting themselves into trouble.