Bank Fees: With 'Protection' Like This, Who Needs Enemies?

Whoever came up with the term "overdraft protection plans" was an evil genius. The plans don't protect against overdraft fees. They allow those fees to be assessed.

A new report from the Consumer Financial Protection Bureau (CFPB) shows just how much the plans cost many of the consumers who sign up for them. It also demonstrates how much banks rely on overdraft fees to cover their costs at a time when checking accounts are far less profitable.

If consumers really understood how overdraft protection works, it wouldn't sound so safe. CFPB officials are considering new rules on how banks pitch the plans to customers, as Bloomberg's Carter Dougherty reports. An average of $259 per year in fees for overdraft and non-sufficient funds are paid by those who opt into overdraft plans. That's seven times more than customers who resist banks' entreaties to sign up. The fees are a huge revenue source for banks, bringing in more than $30 billion and making up more than half of all checking account fees.

The banks argue that overdraft protection saves customers from embarrassment. If a customer account doesn't have enough money, banks typically don't let debit card and ATM transactions go through. With overdraft protection, they let customers make their purchase or get their cash -- for a typical fee of $34. And the fees are often more costly than the typical item purchased: According to the CFPB, the median purchase that incurs a debit-card overdraft fee is $24.

Overdraft-ers essentially get a small loan for a few days -- with an annual interest rate percentage in the thousands. Most pay back the money quickly, the CFPB says, with 76 percent replacing the money within a week.

If the CFPB tightens rules on the marketing of the plans, banks will make up the money somehow. It costs banks between $192 and $359 per year to maintain a checking account, estimates Javelin Research and Strategy. Some of that is covered by lending out money, but low interest rates mean banks earn less on loans these days. The rest needs to come from fees and cost-cutting. Many big banks have dropped "free checking" programs and steered customers to banking online, which is cheaper than banking in branches, says Javelin analyst Aleia Van Dyke.

The CFPB won't say what sort of regulations it might consider for the plans. One suggestion: Force banks to call "overdraft protection plans" by a more accurate name. Here's one: "Short-Term 17,000-Percent Rate Loan Programs."

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