They called it the “$39 cup of coffee.” At many banks, customers were automatically — often unwittingly — enrolled in overdraft programs that would permit debit purchases to go through even if it would overdraw their account, to the tune of up to $35 a pop. But a year and a half after new Federal Reserve rules kicked in to protect consumers from these automatic fees, we still forked over a collective $29.5 billion in overdraft charges for the year. What went wrong? Banks pocketed some serious cash from overdraft fees, according to research company Moebs $ervices, Inc. A decade ago, these fees were a $23 billion business. But once banks realized the magnitude of this revenue stream, they started pushing the envelope. In 2009, overdraft fee revenue hit an all-time high of $37.1 billion.
The Fed stepped in with its new rules in July 2010, requiring banks to get customers’ permission before enrolling them in a program that would let them overdraw when paying with a debit card. Banks asked for that permission, but according to Susan Weinstock, director of the Safe Checking in the Electronic Age Project at the Pew Charitable Trusts, they presented the question in such a confusing way that consumers often didn’t know which option they were getting. “We are concerned that there’s still a lot of confusion out there,” she says.
The $35 fee option became known as overdraft “protection,” and banks sent scary-sounding letters warning customers that if they didn’t sign up for it, their debit cards could be denied by a merchant. “One thing that came out of those focus groups is that people are confused about what opting-in is,” Weinstock says. Many people think that choosing the bank’s “protection” means that they won’t be charged an overdraft fee, whereas the reverse is actually true. Research conducted by the Center for Responsible Lending came to the same conclusion.
Another reason so many people are overdrawing their accounts — even after being warned of the risks — is because of “float,” according to Mike Moebs, CEO of Moebs $ervices. When people used to pay for groceries or other purchases with checks, it would often take a couple of days before that money was withdrawn from their account. If a customer got paid on Friday and wrote a check on Thursday, there was a pretty good chance they’d be in the black again by the time the store cleared their check.
Today, it’s another story. “Ultimately, float … has virtually been eliminated in check processing system in past seven years,” Moebs says via email. In 2001, the median float — that is, the amount of money being processed at any given time — was $8.8 billion. Now, it’s not even $400 million.
Finally, banks are still making almost $30 billion from overdraft charges because the amount they charge when a customer overdraws their account has risen steadily. After five years during which the median charge was $25, it’s inched up since then. In 2011, the median overdraft fee was $29.