Banks’ Overdraft Charges Cost Unknowing Customers Billions of $$ Every Year

Man taking a debit card out of his wallet

According to a Pew analysis, U.S. banks make huge profits from overdraft charges often behind their customers’ back. What’s more, most banks are not very explicit on the fees they may charge for their overdraft services. So, inspect every document carefully your bank wants you to sign.

U.S. banks initially offered overdraft services to spare their customers the embarrassment of not being able to honor a check because their accounts were temporarily empty. However, despite the nice start, the services have turned into expensive loans with annual interest rates of thousands of percentage points. And it happened without most of  their customers’ knowledge.

A Whopping $11.6 Billion in Overdraft Charges

The recent report focused on five of America’s largest banks, with assets worth more than $1 billion. Last year, these banks charged their clients $11.6 billion for overdraft services. The analysis also found that overdraft charges more than doubled in the last three decades.

In addition, lower-income customers pay the bulk of the fees. Pew researchers learned customers who earn less than $50,000 pay 90 percent of those charges. Co-author of the report Joy Hackenbracht unveiled that this group of customers is young and low-income.

Yet these customers not only fork out billions of dollars in overdraft fees but they do it for extremely small sums of money. According to the research, the average transaction that triggers an overdraft fee is $24. And overdraft fees usually stand around $30 and $35 per transaction.

So, banks charge many customers $35 every time they withdraw money from an ATM or used their debit card to purchase something when having insufficient funds. Worse, most banks fail to instruct ATM machines to reject a debit card if there is no money in a deposit. Instead, the machines customers by default. And the same goes for debit card purchases.

Pew investigators found that 40 million Americans pay overdraft fees, some of whom pay multiple fees a day. As a result, many Americans stopped using bank services and turned to prepaid debit cards. And many of them admitted overdraft charges was the number one reason they did it.

Customers Unaware of the Costs

It is unclear why so many people fall for this trick. Experts think that they are either desperate to cover for short-term expenditures such as a rent or are simply unaware of the real costs. Many bank customers who opt out say that they don’t known when they signed for the overdraft service in the first place.

Pew thinks banks could solve these problems by either denying transactions or limiting the number of annual overdraft charges. Customers say that they would rather see their debit card denied than face hundreds of dollars per month in overdraft fees. Other solutions include changing regulations for the services or encouraging banks to offer cheaper loans for needy customers.

Nevertheless, the situation may not change, experts say, because banks rely on these fees to boost their bottom lines when interest rates are low. Pew researchers agree banks should make some profit too but they should be more transparent about those fees.

Nick Bourke of the Pew Charitable Trusts noted that overdraft charges are now “a form of expensive, high-cost credit.” He thinks banks should not process overdraft requests in a way that is detrimental to their customers. For example, they could prioritize some transactions instead of clearing the largest transactions first. This practice usually leaves the customer without funds faster and more prone to overdraft fees on smaller transactions.

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