Initially, overdraft protection products were introduced as a convenience intended to spare bank customers the embarrassment of a bounced check. As banks increasingly recognized the potential profits of covering short-term charges, the product was expanded to apply to debit card transactions and even transactions performed at an ATM. Many consumers are unaware that overdraft protection is part of their accounts and are under the impression that their debit card will be rejected if the transaction would overdraw their account. Instead, the bank lends them the money necessary to complete the transaction along with a $25-35 fee. Common deceptive processing procedures have also increased the frequency of overdrafts, with some banks processing the largest transactions first, instead of in the order they receive the charges, so that customers incur more overdraft charges.
The result? Banks bring in over $27 billion a year in overdraft charges—more than on credit card penalty fees.
Consumers are rightly upset, and in a bid to avoid the national outrage that led to the federal crackdown on abusive credit card practices, Bank of America, Chase, and Wells Fargo will now allow customers to opt-out of their existing overdraft programs and new customers at Bank of America and Chase will have to affirmatively opt-in to the program in order to receive overdraft protection. Chase is discontinuing its practice of processing the biggest payment first.
The changes introduced by these three banks will address some of the problematic features of overdraft protection, but meaningful protections must be applied industry-wide. Real reform means consumers should be enrolled in an overdraft protection program only if they have affirmatively opted in and charges should be levied only due to consumer behavior, not processing procedures such as gaming the order in which charges are applied.
The recent changes from Bank of America, Chase, and Wells Fargo will help consumers avoid some of most deceptive trick and traps associated with bounced check loans. But these voluntary changes must become federal regulations applied to all overdraft programs, from the largest retail bank to the smallest credit union. Opt-in requirements, charges based on actual consumer behavior instead of processing quirks, and clear disclosure of the cost of credit should be mandated for all overdraft programs.