Study: Americans Paid More Than $11 Billion in Overdraft Fees in 2015, Majority of Which Came From Just 18 Percent of Customers

Chris Gaetano
Published Date:
Dec 21, 2016

A study from the Pew Charitable Trust found that Americans paid major banks $11.16 billion in overdraft fees in 2015, and that of these fees, 91 percent were borne by only 18 percent of account holders. Many of these 18 percent are what the study calls "heavy overdrafters," those who have more than $100 of these fees in a year, who generally have incomes below the U.S. average. For 25 percent of these heavy overdrafters, fees consumed nearly a full week's worth of their household incomes, on average, over the past year, said the study. 

"[T]he cost of overdraft programs is borne disproportionately by a small share of financially vulnerable consumers," said the study. 

Not helping matters is that 40 percent of banks process transactions from the largest to smallest dollar amount, something that reduces account balances faster and results in more overdrafts than other methods, such as arranging transactions chronologically. So under the largest-to-smallest method, if you have $1,000, and bought one $990 item and ten $10 items, you'd have nine individual overdraft fees. If this order were reversed, smallest to largest, then you'd only have one. 

All of this discourages people from having a bank account, with Pew saying that over 60 percent of people who don't have one cited high or unpredictable overdraft fees as a reason for not joining a bank. And even those with bank accounts tend not to be crazy about overdraft programs: Pew said two-thirds of bank customers would rather the transaction be declined if they don't have enough money instead of being charged $35, particularly since, according to Pew, these fees tend to be levied on small transactions. 

The Pew study noted that while overdraft programs began as a courtesy to account holders, banks have come to increasingly rely on the fees they generate to drive profits, to the point where, today, they make up two-thirds of all consumer deposit fee revenue. This growth, according to Pew, is attributable partially to growing competition between banks and partially to government deregulation. Pew stated that there was also an emerging sense among banks that fees could diversify revenue sources too. 

Another factor is that fees in general began to rise as interest income for banks began to shrink. The study said that overall fee revenue (including overdraft fees) for the banking sector was comparatively small in 1984, making up less than $100 billion in revenues, compared to interest income, which was more than $800 billion. By 2015, however, this gap has significantly narrowed: interest income was a little less than $500 billion while fees were more than $300 billion dollars. 

In order to address the issues that have come from the rise of overdraft fees, Pew made the following recommendations: 

  • Enable banks and credit unions to offer affordable small-dollar loans in place of expensive overdraft penalty programs. The CFPB should set clear product safety standards for such credit products, including guidelines for affordable payments and reasonable time to repay.22 This should be done in conjunction with other federal agencies that regulate the safety and soundness of financial institutions (known as “prudential” regulators) as appropriate.
  • 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). When customers incur the maximum number of fees, any additional credit extended to them should be required to comply with the rules that govern other types of credit.
  • Prohibit banks and credit unions from maximizing overdraft fees when posting deposits and withdrawals, such as by reordering transactions by dollar amount from highest to lowest, causing the account to be overdrawn more quickly and incur more fees.
  • Require financial institutions to provide account holders with clear, comprehensive terms and pricing information for all available overdraft options to ensure that consumers can make the best choice for their personal situations, including choosing not to opt in to any coverage.
While the Consumer Financial Protection Bureau has studied bank overdraft fees, Bloomberg said that it's unlikely they will come out with any rule proposals on the matter soon, despite the item being on the agency's Spring rulemaking agenda. Bloomberg said this is probably because the agency already has a large number of complex projects it needs to get through, and probably does not have the resources for another. 

None the less, Pew insisted that action was needed to help the vulnerable populations who are disproportionately affected by these overdraft fees. 

"Banks are effectively charging their most financially vulnerable customers high prices for short-term loans... Consumers—especially those who are most financially vulnerable—need protections to help them avoid expensive overdraft fees and remain viable in the banking system," said the report. 

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