Pew: Most Large Banks Fail to Meet Overdraft Best Practices

WASHINGTON—Most of the largest U.S. banks continue to charge high, and often multiple, fees each time a customer incurs an overdraft. Additionally, more than 2 in 5 banks rearrange transactions in a manner that maximizes overdraft fees. Further, overdraft programs at a selection of small banks throughout the country are comparable in many respects to those at the large banks, with a few notable differences. These are among the key findings of two new analyses from The Pew Charitable Trusts: “Consumers Need Protection From Excessive Overdraft Costs” and “How a Set of Small Banks Compares on Overdraft.”

“The prevalence of fee-based overdraft programs at both large and small banks underscores the need for new policies to prevent ‘courtesy’ overdraft programs from being costly and unsustainable forms of short-term credit for many financially vulnerable consumers,” said Nick Bourke, director of Pew’s consumer finance project. “Regulators should set reasonable limits on overdraft fees and help banks create new small-credit options for those who want them.”

Pew reviewed disclosures from the 50 largest banks (by domestic deposit volume) and bank revenue data as reported to the Federal Deposit Insurance Corp. Key findings include:

• Service charges on deposit accounts, which include overdraft and nonsufficient funds fees, have more than doubled while interest income has decreased during the past three decades.
• Most of the largest U.S. banks with consumer checking accounts continue to charge at least $35 each time an overdraft is incurred.
• Many of the largest U.S. banks with consumer checking accounts fail to meet Pew’s recommended best practices on overdraft programs. More than 40 percent of these banks process transactions from largest to smallest by dollar amount—which can reduce the account balance more quickly and result in more overdrafts than other methods, such as posting transactions chronologically—and nearly 80 percent allow overdrafts on ATM and debit point-of-sale transactions.

In addition, Pew found that many small banks also tend to offer fee-based overdraft programs, with most of those charging $28 to $36 per occurrence and most allowing consumers to incur multiple fees per day. However, transaction reordering, which is common among large banks, is rare among the small banks studied.

The study used a rigorous process to randomly select and examine small financial institutions of various sizes. Pew analyzed disclosures from 45 small banks across the country that each hold $360 million to $1 billion in deposits and generally have no more than 30 branches. Although the sample is not representative of all small banks nationally, the findings do highlight practices that are common among many of these institutions and similar to those at large banks, with a few key differences. Specifically, Pew’s analysis found that:

• Forty-two of the 45 banks studied, rather than declining an ATM or debit card transaction that would overdraw a consumer’s account, allow customers to opt in to overdraft service for ATM and debit card transactions; the median fee for each overdraft is $32.
• All 45 of the banks allow customers to incur at least $90 in fees each day for any overdrafts the banks service under their programs, including checks, electronic transfers, and debit, ATM, and bill payment transactions. Many permitted much higher daily totals.
• Only two banks disclose that they reorder transactions from high to low by dollar amount. The other 43 either do not disclose posting policies or say that they post transactions from low to high by dollar amount or in a neutral manner.
• Twenty of the banks disclose a limit on the amount of credit available per account to cover overdrafts and accompanying fees, with a median amount of $500.
• Forty of the banks either do not disclose a monthly fee or disclose one of two policies: Either they do not charge a monthly checking account fee or they waive the fee if the customer agrees to receive electronic statements. Only five banks disclose charging a monthly fee that cannot be waived by electing electronic statements.

Prior Pew research found that many consumers do not recall opting in to overdraft coverage; that most would rather have transactions declined than pay stiff overdraft penalties; and that many of the most financially vulnerable consumers pay the most fees when overdraft essentially becomes, for them, an expensive form of small-dollar credit. To limit the negative financial impact of overdraft fees on the account holders who incur them the most, Pew urges regulators to revise federal rules to ensure that overdraft programs are transparent and designed only for infrequent and accidental occurrences using any or a combination of the following:

• Enable banks and credit unions to offer affordable small-dollar loans in place of expensive overdraft penalty programs.
• Make overdraft penalty fees reasonable and proportional either to the financial institution’s costs in providing the overdraft loan or to the overdraft amount.
• Allow financial institutions to charge customers a maximum of six overdraft fees in any 12-month period, and limit such fees to one per negative-balance episode (i.e., an overdraft that incurs one or more fees).
• Prohibit banks and credit unions from maximizing overdraft fees when posting deposits and withdrawals.
• Require financial institutions to provide account holders with clear, comprehensive terms and pricing information for all available overdraft options.

The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at pewtrusts.org.