How to steal $35 billion…

CFPB Report: Typical Overdraft Situation Is Comparable To Small-Dollar Loan With 17,000% Interest Rate

If you’re one of the hundreds of millions of consumers who use a debit card you’ve likely found yourself on the receiving end of an overdraft fee when your account balance just wasn’t quite enough to make a desired purchase. While consumers might not necessarily question the occasional overdraft fee, a new report from the Consumer Financial Protection Bureau puts the fees into a disconcerting perspective.

According to the report [PDF], a majority of the $32 billion in annual debit card overdraft fees are incurred for transactions of $24 or less, and the majority of those overdrafts are repaid in three days. That doesn’t sound too bad, right? Wrong. The CFPB did the math and if a consumer borrowed $24 for three days and paid the average overdraft fee of $34, that would mean their “loan” comes with an interest rate of 17,000%.

That seems outrageous. But we’re not done. Consider the fact that consumers are twice as likely to use their debit cards as their credit cards and that the average debit card holder uses their card 17 times each month, giving ample opportunity to run up those overdraft fees.

In fact, the report found that more than half of consumer checking account income is from overdraft fees – often the costliest of all banking fees. That’s a problem the CFPB is looking to tackle as it works on creating necessary consumer protections for overdraft and related services.

“Overdraft fees should not be ‘gotchas’ when people use their debit cards,” CFPB director Richard Cordray says. “We need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”

The CFPB study examined nearly two million consumer checking accounts and found that approximately 14% opted for overdraft protection.

On average, those customers paid about $260 a year in overdraft and non-sufficient fund fees. That means that a consumer would have at least 10 overdraft occurrences in a 12-month period.

On the other hand, consumers who did not opt-in for the plan paid just $35 in annual fees.

One concern regulators encountered when reviewing the study data was the way in which banks organize transactions. Some banks were found to have maximized overdraft fees by processing transactions not in the order in which they are made, but in a way that results in a larger number of overdrafts.

The practice, often called stacking, has been criticized by a number of consumer groups, including Pew Charitable Trust which has studied the overdraft process extensively.

In a June report on overdrafts, Pew found that reordering only inflates the issue of overdrafting and in the end consumers pay significantly more.

Pew reports that while banks have employed additional policies that can help limit the impact of overdraft fees, including reordering only certain types of transactions, implementing a threshold amount to trigger an overdraft, and not charging an extended overdraft fee, more attention is needed for this often unfair practice.

Just last month, Wells Fargo announced it would put an end to the practice for its checking customers. The bank previously stopped reordering debit card transactions and ATM withdrawals.

While Wells Fargo’s move is a step in the right direction, issues concerning overdraft fees continue to be prevalent, even though some federal regulations were put into place over the last five years.

Not too long ago, consumers were often unaware of overdraft fees until they appeared on their statements. That changed back in 2010 when federal regulators mandated that banks use an “opt-in” requirement. That mean institutions had to obtain consumers’ consent before charging fees for allowing overdrafts on most ATM and debit card transactions.

While the mandates meant that consumers were more aware of their account being enrolled with overdraft protection, that doesn’t mean they fully understand the program or realize the amount of fees they’ll actually incur.

Around the same time, some banks updated their policies to allow customers to not be charged if they are only overdrawing their account by a small amount, such as $5. Additionally, some banks began capping the number of overdraft and NSF fees charged on an account on a single day.

Cordray says that today’s report doesn’t mean banks should stop offering overdraft coverage, it just means there needs to be a determination of whether current practices are causing consumers more harm than good and if consumers have a clear understanding of the plans to begin with.

2 comments to How to steal $35 billion…

  • Robert Bouillon

    Robert Bouillon wrote:
    ” I’ve worked on banking systems. The answer is $0.00. Or close to zero, anyway.

    In older systems, the cost is 3~8% of the overdraft amount. This is because when you take money out of your account, it doesn’t check your account FIRST. It just registers the withdrawal, and your account is balanced later by a secondary system. If the balance is negative, the bank has to cover you, which literally means it’s loaning you money. The money you’ve borrowed now prevents that money from being lent to other consumers, which could theoretically yield 3%-8%, depending on the product. So by loaning you the money, instead, that’s what they could have lost, and that is the cost.

    Now in modern systems, the account balance is always checked before authorizing a withdrawal (for a few reasons I won’t go into). This amounts to a “database read operation”, meaning that the value for your account is read from the database. Because it’s a “read”, nothing is changing, and tens or even thousands of reads can happen simultaneously. Ergo, reads are cheap.

    When you ACTUALLY withdraw money, you have to change the account balance, and this is a “database write operation.” Writes are expensive, because you can’t have thousands of writes just happen at the same time. What if you withdrew $20 from an ATM and, at the same time, your car payment hits and takes out $500? If you had $600, what’s your final balance? $580, $100, or $80? This is called a “race condition” (because the withdrawal that wins the race, or gets to your account first, is the one that hits) and causes very bad things to happen. For this, databases use “locking” which slows down database writes, making writes relatively expensive.

    So to sum up – the act of withdrawing money is actually MORE EXPENSIVE to the bank than simply checking your account to see if funds are available and rejecting the transaction. The actual cost to the bank is the same as any other transaction you make, and with modern computers, usually amounts to fractions of a cent. This is proven by credit card companies, who use the same systems, and will simply reject your purchase if you lack the credit.

    Some additional reference –
    Remember when banks gave you free gifts for opening a checking account? Remember when a savings account would get you 3% – 5% a year? That’s because the banks needed your money to write loans.

    Well, since banks can borrow an unlimited amount of money from the federal reserve (since we dropped the gold standard), the banks don’t need your money. If they need money for a loan, they’ll get it from the fed at the federal rate. It’s been 0%~1% for a few years. So why pay you 3% when they can get it from the fed for free (0%)?
    So what to do with all the checking accounts?

    Well, they realized that, with direct deposit, if you overdraw your account, there’s a reasonable guarantee that the overdraft will be covered by your next direct deposit, including any fees that get tacked on. So there you have it – the birth of the NSF scam. That’s why all “free” checking accounts require direct deposit.

  • perachtis

    But the real bitch with this is no one, including the CFPB can or has done much about it. If you want to find out precisely how much a NSF actually cost the issuing bank, GOOD LUCK . Searching on Google provided ZERO links.

    Then try to link a credit card to your checking account so that insufficient funds simply roll over to a credit card….yeah, some banks will allow that…BUT THEY STILL CHARGE YOU on average at least $20….for something that costs them about $0.17 max. In 2017 a survey of only the largest ten banks showed they extracted $35 BILLION from depositors in NSF fees in 2017. While some of us bitch and moan about immigration instead of the real contributors to this theft and subsequent malaise in the Commons. But you know what? As long as they are permitted to do so by the Government, they will continue gouging the public. If you -believe- good ole private enterprise will reign this in…(yeah….that’s right

    And now you also understand why the Banks are so happy to talk their depositors into using a debit card. In addition, businesses like debit cards too…it’s automated so they don’t have to spend time counting real money, or be overly concerned with employee theft, or deal with chargebacks. It’s a win-win for “them” and a legal way to “steal” from us…the 99%.

    Yeah, they are muddyphuckers!

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>




This site uses Akismet to reduce spam. Learn how your comment data is processed.