Bank Overdraft Fees Keep Climbing in Spite of Consumer Preferences

According to statistics from Moebs Services, Americans were charged $34.3 billion in overdraft fees by financial institutions in 2017, a full $1 billion more than 2016. Fees managed to rise again despite one-third of banks decreasing their overdraft fees last year. The average overdraft fee remained flat at $30.

Overdraft fees serve as a big source of revenue for banks. Surveys have shown that many consumers would actually prefer if the bank denied a transaction when there are insufficient funds in the account, instead of charging an overdraft fee and letting the transaction take place.

Overdraft fees function as a short term loan from banks to account holders to cover a purchase or payment the customer would not have had the money to pay. As a previous Consumer Financial Protection Bureau (CFPB) study showed, the annual percentage rate for borrowing $24 with a $34 overdraft fee is around 17,000%.

As part of the CFPB’s financial education mandate, the agency released a report chronicling consumer experiences with bank account overdraft coverage. The study found that many account holders did not understand how their banks managed account transactions and the penalties that could arise from overdrafting. Many of the respondents simply forgot about transactions that could trigger an overdraft.

In August 2017, the CFPB announced a proposal for banks to use new standard disclosure forms regarding overdraft coverage. The CFPB’s efforts in this area have strong support from Congressional Democrats, but have received considerable criticism from the American Bankers Association.