Studies Suggest It is Time To Reform Banking Overdraft Policy

You probably don’t need to read a headline to know that a big part of the consumer banking industry is overdraft fees. But even if you are fully aware of this, you may still be surprised to learn that the top banks in the United States charged upwards of a combined $11.6 billion in overdraft fees (and insufficient fund fees) last year, alone.

More than that, however, it is crucial to note that over the past 30 years—just three decades—these fees have doubled (and in some cases, more than doubled). According to related Pew research, roughly one-fifth of all banking customers pay approximately 90 percent of those fees even though the majority of this population earns less than $50,000 per year.

Pew also found that these fees are most often the result of very small transactions. For example, Pew found that the average overdraft fee was $35 but that average debit card transaction resulting in an overdraft was only $24. As such, Pew consumer banking project research officer Joy Hackenbracht notes, “The majority of consumers who pay these billions of dollars in overdraft fees are younger and low income.” And in conjunction, Pew director of consumer finance Nick Bourke comments, “This is a problem that needs a systematic fix,” because it affects as many as 40 million consumers.

Existing Pew research also suggests that these high overdraft fees are a major reason a significant number of Americans have stopped using banks altogether and, instead, are opting for prepaid debit cards. And Bourke also says that those customers who do remain loyal to their bank may not have many other options and simply are unaware of the extent of these fees. He explains, “Some people have opted out but many, many others who are still using checking accounts don’t remember opting in.”

If there is an upside to this research, the studies have also found that the United States is not the only country dealing with this problem. The UK Financial Conduct Authority (FCA) said, in July, that it too was investigating methods for combating the higher overdraft fees that consumers there have to pay too.

Latest News