Consumers Pay the Price for Bank Overdraft Fees

Columbus, OHIf you are like many people, chances are that you have at least once attempted to make a purchase with a bank card only to be informed that your account does not have enough money and the transaction is declined. A potentially embarrassing situation and one that the banks say they are preventing by automatically allowing people to run into overdraft in their accounts. However, many consumers say they were not told about any bank overdraft fees and they did not accept overdraft protection for their accounts, meaning they are paying excessive overdraft fees for protection they never wanted in the first place.

Overdraft protection may seem like a good idea. After all, the consumer gets to avoid the embarrassment of having a transaction denied at the checkout counter. However, consider that some overdraft fees run as high as $35 per transaction, regardless of how far into overdraft the consumer goes. So, a muffin and a coffee, often less than $5, could wind up costing $40, if the consumer goes into overdraft to pay for the transaction.

Consumers are upset that they were automatically signed up for overdraft protection, with no warning about the potential fees. They expected that if they tried to make a purchase without enough money in their account, that the transaction would be denied.

Some also say that their banks have "held" deposits until after all withdrawals have been posted to the account, pushing accounts into overdraft regardless of whether or not they should have been.

For example, a person could have $100 in his account and make a deposit of another $100, increasing the account to $200. Thinking he has $200 in his account, he goes out and spends $150. However, he later finds out that his purchases were posted to his account before his deposit was, meaning he was $50 overdrawn. He has now been charged $35 for being in overdraft, even though he had no idea he was ever in overdraft—and he should never have been, if the deposit and withdrawals had been posted to his account in the proper order.

It sounds like an unethical way to run a business—charge customers for offering protection they never accepted and then run your business in such a way as to ensure that they will require that protection. However, it is also a highly profitable way to run a business. According to a study by the Center for Responsible Lending (quoted in St. Louis Business Journal October 7, 2009), banks and credit unions made almost $24 billion in overdraft fees in 2008. That's 35 percent more than they made in 2007 from overdraft fees.

The study also said that it is standard practice for financial institutions to automatically enroll customers in the most expensive overdraft programs.

So, consumers must now be on the lookout to make sure they are not accidentally going into overdraft—and incurring all the fees that go along with that.