Will overdraft fees benefit from the CFPB inquiry?
March 02, 2012
In announcing last month it will investigate the ways banks process overdraft fees, the U.S. Consumer Financial Protection Bureau signaled it will seek to ban deceptive bank practices on checking accounts. In other words, the CFPB is aiming to fix an issue that previous federal efforts have failed to remedy.
In 2009, the Federal Reserve ordered banks and credit unions to stop automatically enrolling checking account customers in overdraft protection. Customers were required to opt-in if they wanted the help, but some banks allegedly made the opt-in offers so deceptive that many consumers did so without fully realizing it.
And even though millions of checking account customers eventually got the message and reduced their overdrafts, many banks responded to the declining overdraft revenue by increasing fees. The latest MoneyRates.com Bank Fees Survey indicates that the average overdraft fee among banks in the study rose to $29.23, up from $28.85 in the mid-2011 survey.
Overdrafts are down but revenue remains high
According to a study by Moebs Financial Services, the number of overdrafts per household per year decreased from a high of 9.8 in 2009 -- when bank overdraft revenue peaked at $37.1 billion -- to 6.7 in 2011. Still, overdraft revenues were estimated to be near $30 billion in 2011, due in part to the rising average fees.
While banks used to threaten to shut down checking accounts because of bounced checks, overdraft charges have become a key revenue source for banks in recent years. The initial rise in overdrafts may be due in part to bank customers having more ways to access their checking accounts, including debit cards and ATM machines, which potentially make it easier to lose track of spending and incur overdrafts.
Gone are the days when you wrote checks for everything and recorded the amounts in a checking account register. In those days, you had the luxury of what banks call "float" -- the grace period between the time you write the check and the time check actually clears your account. Because debit and ATM transactions are processed more quickly than checks, the window for noticing a mistake has narrowed substantially.
And nowadays, faced with the prospect of being publicly embarrassed by having your debit card declined with the line at Starbucks breathing down your neck, it's perhaps no wonder that people opt in to overdraft protection.
How banks clear transactions
In addition to banks' opt-in policies and the size of their overdraft charges, the CFPB also indicated it will look into the ways banks clear transactions. According to the Philadelphia Inquirer, many banks are still clearing transactions according to the size of the payment and not when it comes in. By deducting the large transactions first, the banks leave many customers with a higher number of overdraft charges on a handful of smaller transactions -- a phenomenon known as the "$39 cup of coffee."
Banks have argued that it's better to ensure the large payments -- such as that for your mortgage -- don't bounce and hurt your credit score, but many consumers may still prefer to have one overdraft charge on large payment than a half-dozen overdrafts for incidentals they purchased with their debit card.
If the CFPB moves to address these problems, it could leave banks substantially less room to earn revenue on overdrafts, which could mean that attempts to hike other fees are just around the corner.