Banks’ Overdraft Policies Are Getting More Confusing

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Paul Sakuma / Associated Press

Last week, JPMorgan Chase & Co. announced that it’s eliminating overdraft fees on purchases of $5 or less. Also this month, regional banks Fifth Third and U.S. Bank are raising their overdraft fees for multiple overdrafts and overdrafts over $15, respectively. These are just the latest developments in an increasingly complex balancing act for banks, which are trying to maintain or raise their overdraft revenues without annoying customers so much that they leave — or complain loudly enough for regulators to take notice.  

Do more complicated overdraft fee structures help or hurt customers — or just drive them crazy?

Banks still want to make money on overdraft fees, and to a large extent, they still do. Although the $31.6 billion in overdraft revenue banks earned last year is down from the industry high of $37.1 billion in 2009, banks are still pulling in huge money more than a year after laws went into effect designed to limit bank customers’ exposures to these fees.

If you don’t see how that makes a lot of sense, you have company: Regulators think so, too. In February, the Consumer Financial Protection Bureau began an inquiry into overdraft fees to find out if the ways banks market overdraft programs and process transactions that trigger overdrafts are on the up-and-up or deliberately sneaky.

“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees,” he said then in a statement.

(MORE: They’re Baaack: Americans Paid $31.6 Billion in Overdraft Fees in 2011 — and the CFPB Ain’t Happy)

Several big banks use tiered structures now: The first overdraft is waived or costs a modest amount — maybe $15 or $25 — but subsequent overdrafts whack you with fees that could be as high as $37 (the rate at Citizens Bank and, as of this week, Fifth Third Bank).

Another variation of tiered overdrafts is based on the dollar value — either of the amount the account is in the red or the purchase amount. Some banks won’t charge customers if their account is overdrawn by $5 or $10, while others, like Chase, let small purchases go through.

A few big banks — Bank of America, Citibank, and HSBC — flat-out don’t permit debit point-of-sale transactions to go through if there’s not enough money in the account and don’t charge customers a fee. Citibank and HSBC also do the same at ATMs.

In a recent report on the topic, researchers at the Consumer Federation of America also point out that banks are increasingly piling additional penalty fees if an account remains overdrawn for a period of time. These “sustained overdraft fees” can pile up in a big way. The CFA says customers of the banks it studied could be hit with between $102 and $370 in overdraft penalties — in a single day.

What do these changes mean for bank customers? Obviously, eliminating fees for small amounts gets rid of the so called $39 cup of coffee phenomenon: having to pay an overdraft fee many times the amount of your purchase, which understandably makes people livid.

(MORE: The Credit Card Companies With the Most Consumer Complaints)

This shift in fee structures that give more lenience to small, short-term and infrequent overdrafts while ratcheting up the penalties for customers that overdraw frequently could have a disproportionate effect on those who are already struggling with money. According to the Federal Deposit Insurance Corporation, just under 10% of bank customers bear 84% of the costs for all overdrafts.

To a large extent, these people are young and poor — demographics that cannot easily afford hefty fees. According to the Pew Charitable Trusts Safe Checking in the Electronic Age project, people younger than 44 or who earn less than $30,000 a year are nearly twice as likely as other Americans to get hit with an overdraft penalty fee.

In his statement back in February, CFPB director Richard Cordray said, “Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it.” Banks have made no secret of the fact that they’re trying to court high-income Americans: JPMorgan Chase executives said earlier this year that 70% of customers who have less than $100,000 at the bank will be unprofitable.

Without the ire of the middle and upper class fueling the push for legislative reform and oversight when they get stuck paying $39 for a $4 latte, the much smaller voice of the most vulnerable Americans might not be heard.

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