How New Overdraft Protection Rules Don’t Protect You

August 16th, 2010. By Kristine B

So as of August 15, new banking regulations went into effect for overdraft protection—meaning you are no longer automatically opted-in for overdraft protection. That’s good news, because it could save you some money. The bad news is that the protection doesn’t extend to ALL overdraft transactions. Making matters worse, some banks (okay, many banks) are trying to convince customers to sign up for overdraft protection. Because this is the first week for the new overdraft protection regulations, this week’s Pleading Ignorance looks at the new regulations, how they affect you and why banks still want you to sign up.

First, though, what is overdraft protection? Overdraft protection is a way of allowing a customer’s transaction to proceed even if the customer doesn’t have enough money in his account for that transaction. If you buy a $10 lunch but only have $5 in your account, without overdraft protection that transaction will be denied. But if you have overdraft protection, the bank will authorize the payment.

The catch, though, is that overdraft protection can be expensive—up to $35 per transaction. So, that $10 lunch winds up costing you $45. Worse, you may not realize you were enrolled in overdraft protection. Some banks automatically enroll customers in the program. So you might have expected that the transaction would be denied (hopefully, you have a back-up plan for payment) but it was approved—complete with fees.

Making matters worse is that the banks have been accused of reordering customer transactions to push customers into overdraft faster, because EVERY overdraft transaction results in that $35 fee. They are also accused of holding deposits so that customers, thinking they have funds in their account to cover a transaction, are pushed into overdraft.

Pleasant, no? Enter new legislation requiring banks to obtain customer approval before enrolling them in overdraft protection. From now on, customers can’t be automatically enrolled—they have to agree to it first. For the most part, this is good news. But, beware, because the legislation ONLY extends to ATM or debit transactions. Automatic payments from accounts or checks that push accounts to be overdrawn will still be eligible for overdraft protection without the customer’s approval.

Naturally, the banks look for ways to encourage people to sign up for overdraft protection. After all, they made billions of dollars off fees (including overdraft fees) in 2009. That’s a lot of dough for them to lose out on. So, they’re encouraging customers—especially those most likely to need overdraft protection—to enroll. They remind customers of the embarrassment of having a transaction declined at the checkout counter and point out that overdraft protection is free unless it’s used, so there’s no risk in accepting it.

Of course, the issue for customers is one of money. If a customer doesn’t have $10 for lunch, where will he get the $35 to cover the overdraft fee? It can wind up being a vicious cycle where overdraft fees result in further declines into overdraft. The overdraft becomes difficult to get out of, and so more transactions result in accounts being overdrawn further—which leads to more fees.

But the banks don’t want you to think about those pesky fees. They want you to consider how embarrassing it is to be at the checkout counter and have your transaction declined. To the banks, that few moments of saved embarrassment is worth the $35 fee, even if that fee is charged to pay for a $10 lunch.

Tags: Excessive Overdraft Fees, Pleading Ignorance

This was posted on Monday, August 16th, 2010 at 11:30 am and is filed under Consumer Fraud, Pleading Ignorance . Feel free to respond, or trackback. Read our comments policy.