Fifteen years ago, banks offered overdrafts as a brief extension of credit for their customers; since then, overdrafts have transitioned from an occasional courtesy to a calculated practice designed to extract fees.
As pointed out in a recent Wall Street Journal article, overdraft fees are at an all-time high. (Overdraft Fees at Banks Hit a High, Despite Curbs, April 1, 2014)
They have also have effectively become a form of predatory lending. More than half of Americans are now living paycheck to paycheck, making a majority of U.S. families vulnerable to bank overdraft practices that are exceedingly misnamed :overdraft protection." Research from the Center for Responsible Lending found that two-thirds of the penalty fees are paid by account holders charged more than six fees per year with a median overdraft charge on debit cards of $35. And many banks continue to manipulate the order of consumers' transactions in order to charge more fees. Taken together, these findings show greater scrutiny of these practices is needed in the marketplace.
Unsurprisingly, this has real costs for consumers. For a segment of checking account holders, often lower-income communities and communities of color, overdraft fees can spiral out of control. Overdraft fees can trigger charge after charge sometimes multiple charges per day as well as extended and recurring fees. For consumers with limited, fixed or low incomes, the impact of overdraft fees can be catastrophic. Thankfully, a small but growing minority of financial institutions have been testing fairer ways to offer checking accounts.
Several banks have taken the high road, choosing not to charge unnecessary overdraft fees on debit card and ATM transactions. Last month, Bank of America introduced SafeBalance, a new bank account that takes overdraft fees off the table. The new "checkless" checking account is a promising innovation in the marketplace; it allows consumers to access their funds through a debit card, online banking, and ATMs, and charges no overdraft fees. When consumers don't have enough funds in their account for a purchase, the transaction will simply be declined.
Bank of America charges $4.95 a month for this account a fee which has drawn some criticism since the new product was announced. And while pundits and critics may chastise the bank for this practice, a flat, transparent $4.95 monthly fee is likely far more manageable than unexpected $35 overdraft fees that occur seemingly randomly. Several banks, including Citibank and Bank of America, do not approve purchases where there are insufficient funds and do not charge their customers' overdraft fees on debit card purchases the largest and fastest growing trigger for overdraft fees. Last summer, Union Bank in California was lauded by consumer advocates for introducing Access Account, a similar flat-fee account with no overdraft fees.
Smart banking solutions can be a step toward protecting consumers against the malicious effects of overdraft fees. Greater movement toward up-front charges and the elimination of back-end fees, like overdrafts, also enables consumers to predict the cost of a checking account and shop accordingly, thus introducing greater competition into the market.
In addition to market solutions, the federal agencies have a role too: In 2010, the Federal Deposit Insurance Corp. issued supervisory guidance discouraging banks from charging more than six overdraft fees in a 12 month period and encouraging banks to employ neutral posting order of transactions. And, having undertaken a study of bank overdraft programs, the Consumer Financial Protection Bureau is poised to take steps to address harmful overdraft practices. If crafted properly, CFPB action could have decisive impact on those consumers who bear the brunt of overdraft fees.
Overdraft fees can be financially destructive to many households, especially those with precarious financial situations. But with principled new solutions from the banking industry and sufficient regulation from federal agencies, we can protect consumers, and their financial livelihoods, better.
Wade Henderson is president and CEO of the Leadership Conference on Civil and Human Rights. Mike Calhoun is president of the Center for Responsible Lending.