The problems with banks' overdraft practices go well beyond outright abuses. The solutions must go beyond punishing those abuses.
This week, the Consumer Financial Protection Bureau released a report that found consumers are still getting gouged by high overdraft fees. It's unclear what will happen next, but American Banker Washington Bureau Chief Rob Blackwell predicts the agency will forgo writing new reforms and, instead, straighten out bad actors via enforcement actions. This seems like a fair route to go, but it won't resolve the inconsistencies or the consumer confusion highlighted in the CFPB's report.
For starters, existing regulations on overdraft practices are one reason these problems persist. Rules introduced by the Federal Reserve in 2009 require banks to get express permission to enroll consumers in overdraft protection for ATM and one-time debit card transactions. But the requirement doesn't apply to overdrafts from recurring debit card charges (like monthly gym membership payments) or from checks that would otherwise bounce. This essentially means consumers can get hit overdraft charges even if they haven't opted in for a program.
You could argue that consumers need to make sure they understand this when they open accounts. But just review some big banks' online "frequently asked questions" pages about overdraft practices to get a sense of how hard it can be to determine when an overdraft will be permitted and when a fee whether related to the overdraft or its increasingly popular foil, insufficient funds is coming.
Per Capital One's (COF) Overdraft Options (emphasis added):
"We may continue to authorize, at our discretion, checks, other payments using your checking account number, and debit card transactions that are set up to bill automatically (like a monthly membership fee) even if you do not opt in."
And per Bank of America's (BAC) Overdraft Services FAQ sheet (emphasis also mine):
"For other types of transactions - like checks, optional Bill Pay and other electronic payments, as well as recurring debit card payments - made using your checking account number, we may charge you a NSF: Returned Item fee each time we decline or return one of these transactions. If we pay one of these transactions, we charge you an Overdraft Item fee."
Adding to the confusion is the fact that banks typically offer and market more than one overdraft service to consumers with little uniformity in the terminology they use and the conditions they apply.
Big banks seem to be in general agreement that actual "overdraft protection" is provided when consumers link a checking account to an alternate account, such as a savings account, credit card or credit line, to cover overdrafts. But the names for coverage the bank itself provides when an account holder goes over the limit (which I'd argue is what many consumers think of when they hear the phrase "overdraft protection") vary from firm to firm.
JPMorgan Chase (JPM) refers to this service as Debit Card Coverage. Capital One calls it Courtesy Overdraft Service and Bank of America calls it Overdraft Settings. All three banks charge more than $30 for this service. Meanwhile, fees for transferring money from a linked account to cover overdrafts are generally lower, between $10 and $15. Insufficient funds fees related to transactions that are declined, either because the customer has opted out of overdraft protection or the bank has simply decided not to cover the balance, also hover around $30.
Confused yet? I was, and I write about banks for a living.
Enforcement actions may force a particular bank to change what has been deemed a misleading marketing practice, either as a stipulation of the action itself or a result of the bank wanting to avoid future fines. They may be a great way to get banks to, say, stop re-ordering purchases and then imposing fees. But they're unlikely to create industrywide uniformity of overdraft services.
Until the inconsistencies and intricacies are dealt with, consumers will have a hard time deciphering what is their best overdraft option, and average annual overdraft charges per customer will remain high.
If the CFPB is reluctant to overhaul the regulation put in place in 2009, it may want to consider putting together a simplified disclosure form, likes the ones proposed for mortgages, that banks under its jurisdiction can use. Or, at the very least, it should formally define key terms which exist already for credit cards so customers can get a clearer idea what exactly they're opting for.