Overdrawn: Consumer Experiences with Overdraft

QUICK SUMMARY

This report finds that many consumers still express confusion and disapproval about bank overdraft practices and the rules surrounding them. Despite federal requirements that consumers must agree to debit card overdraft coverage before any fees are charged or services are provided, Pew’s survey finds that more than half of those who incurred a debit card overdraft penalty fee do not believe they ever opted in to the service. This report includes policy recommendations for the Consumer Financial Protection Bureau to make overdraft programs safer and more transparent.

OVERVIEW

Nine out of ten Americans have a checking account, making it the most widely used financial services product in the United States.¹ Overdraft programs at banks and credit unions allow checking account holders to spend or withdraw more money than they have in their accounts. In exchange, banks usually charge a fee for each transaction for which there are insufficient funds in an account.

Consumers generally have three choices when they do not have enough funds to cover a debit card purchase or ATM withdrawal:

• Incur an overdraft penalty fee. The bank makes a short-term advance to cover the transaction and charges a fee for the service (median fee: $35).²
• Incur an overdraft transfer fee. The bank transfers funds from a linked source, such as a savings account, line of credit, or credit card, and charges a fee for the service (median fee: $10).³
• Have the transaction declined. If the consumer did not opt in to one of the above options, the transaction is denied and no fee is charged.

To better understand the experience of consumers who overdrew using their debit card during 2013, The Pew Charitable Trusts commissioned a survey of checking account holders.⁴ The study found that these consumers were often confused and unhappy.⁵ These findings are similar to those in Pew’s 2012 issue brief “Overdraft America: Confusion and Concerns About Bank Practices."⁶

This brief delves into the 2013 results and looks at how they relate to those from 2012, when comparisons are possible. Specifically, the key 2013 survey findings are:

• Younger, lower-income, and nonwhite account holders, as well as those who did not have a credit card, are among those who were more likely to pay an overdraft penalty.
• More than half of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage.
• Ten percent of Americans paid at least one overdraft penalty fee in 2013, and another 5 percent paid an overdraft transfer fee.
• On average, people who paid an overdraft penalty also incurred additional fees, for a total of $69 the last time their account was overdrawn.
• Thirteen percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees.
• More than three-quarters of the people who paid an overdraft penalty express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging “extended” overdraft fees—additional charges for failing to repay a negative balance on time—and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees.
• Large majorities of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account, and they support greater regulation of overdraft products.
• Four groups of consumers surveyed—“overdrafters,” “transferers,” “decliners,” and “never-negatives” (see sidebar)—express similar concerns about overdraft policies, in spite of their differing experiences.

Pew urges the Consumer Financial Protection Bureau to require financial institutions to make overdraft programs safer and more transparent by ensuring that consumers understand their options for overdraft coverage. Although clear disclosure is important, the CFPB should also prohibit the practice of transaction reordering that maximizes overdraft fees and ensure that fees are reasonable and based on the actual cost to the bank of providing the service.

1. Federal Deposit Insurance Corp., 2011 FDIC National Survey of Unbanked and Underbanked Households (September 2012), 4, http://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf. The FDIC estimates that in 2012, 10 percent of U.S. households did not have a checking account;
2. For discussion of median overdraft penalty fees, see The Pew Charitable Trusts, Checks and Balances: 2014 Update (April 2014), http://www.pewstates.org/uploadedFiles/PCS/Content-Level_Pages/Reports/2014/Checks-and-Balances-Report-2014.pdf
3. For discussion of median overdraft transfer fees, see The Pew Charitable Trusts, Checks and Balances: 2014 Update (April 2014), http://www.pewstates.org/uploadedFiles/PCS/Content-Level_Pages/Reports/2014/Checks-and-Balances-Report-2014.pdf
4. Both surveys described in this report asked consumers only about overdrafts caused by debit card transactions. These debit card transactions were at the point of sale—at the cash register, online, or over the phone—or at an ATM.
5. For the remainder of this paper, 2012 survey respondents are those whose transactions occurred in the year prior to the fielding of the 2012 survey, and 2013 survey respondents are those whose transactions occurred in the year before the fielding of the 2013 survey; it is possible that a 2012 survey respondent’s overdraft occurred in 2011 and that a 2013 survey respondent’s overdraft occurred in 2012.
6. The Pew Charitable Trusts, Overdraft America: Confusion and Concerns About Bank Practices (May 2012).