Overdraft Confusion: CFPB White Paper and Pew Center Survey highlight consumer misunderstanding

The Consumer Financial Protection Bureau recently published a whitepaper resulting from a year-long inquiry into the overdraft programs for consumer checking accounts, outlining the incidence of consumer overdrafts, the high cost of overdraft protection, the rate of adoption of opt-in overdraft coverage of ATM and POS debit card transactions, as well as variations in overdraft practices and policies among financial institutions.  The CFPB concluded that the opt-in policy had a significant impact on consumer experiences, and drastically reduced costs for the heaviest overdraft users who did not opt in to such coverage. However, the CFPB found that overdraft-related fees still accounted for the majority of consumer checking account fee revenue for the banks studied, and indicated that the percentage may be even higher for community banks.  The white paper also noted striking differences among financial institutions with regard to insufficient fund transaction rates, the mean overdraft fees paid by consumers, the rate of involuntary account closures, overdraft protection opt-in rates, and the rates at which accountholders link their checking account to a deposit account for overdraft protection.  The CFPB was unable to determine whether the variances were due to demographic issues or to the bank policies and procedures regarding overdrafts, or a combination of both.  However, the CFPB  found no data to support elimination of overdraft protection products. Click here to read the full whitepaper.

The Pew Center's Safe Checking in the Electronic Age Project also published a survey in which it found that overdraft fees disproportionately impact low income and young consumers. Of note, a majority of survey participants preferred declined transactions over the convenience of overdraft protection, indicating that the stigma associated with declines has decreased.  However, one-third of the survey respondents had closed a checking account due to the accumulation of overdraft fees and non-payment penalty fees.  Consumer also expressed strong concern over the practice of reordering transactions to maximize overdraft fee revenue. Interestingly, despite the August 2010 Federal Reserve rule mandating opt in overdraft policies, more than half of those surveyed believed that they had never opted in to their bank's overdraft protection plan.  Click here to read the full survey.