It's not a secret that banks make profits by charging us fees. You may not realize just how much money banks are wringing from us, though -- despite regulations and even the Consumer Finance Protection Bureau (CFPB) that aim to keep them in check. Even more troubling than the total fees banks charge is the fact that much of it comes from relatively few customers, with some folks paying $250 or more each year.
It was just in 2015 that consumer-deposit banks with more than $1 billion in assets started being required to disclose the amount of money they take in from various fees. That includes a lot of banks -- 628 in the fourth quarter of 2015. In all of 2015, these banks took in a total of $11.6 billion for overdraft and nonsufficient funds (NSF) fees. That's a very significant sum -- making up 8% of these banks' total earnings. It's also nearly two-thirds of all fees charged to customers, suggesting that banks are relying heavily on overdraft and NSF fees.
The magnitude of those fees is certainly troubling, but here are some more troubling details, from a 2014 report from the CFPB: The median overdraft fee was $34, which probably seems a bit steep. Even worse, though is that most overdraft fees incurred on debit cards were for transactions valued at less than $25. Remember what an overdraft fee represents: It's triggered when your bank account doesn't have enough money in it to cover a transaction. At such times, your bank is happy to step in and execute the transaction anyway, charging you a fee and expecting you to put funds into your account. The CFPB found that account holders usually repaid the amounts their banks fronted for them within three days -- and noted: " Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000% annual percentage rate (APR)."
Also, a bank's overdraft or NSF fee is usually fixed, so even if there's an overage of just, say, $6, a fee of perhaps $34 will be levied.
Who's shouldering the burden?
So who is generating much of that income for banks? Relatively few customers. The CFPB found that about 8% of customers cough up close to 75% of all overdraft fees. It also tends to be younger customers, with those aged 18 to 25 more than three times as likely as those 62 and older to experience more than 10 overdrafts per year.
It's also very often people using debit cards and ATM withdrawals that incur overdraft fees. That's a bit surprising to some, since right now, banks don't have the right to charge overdraft fees for ATM or debit card transactions that exceed an account's balance. They have to get the account-holder to opt-in to being charged. Many people do opt in, though, not sufficiently understanding the situation. The CFPB found that opted-in accounts have seven times as many overdrafts resulting in fees than accounts where the owner didn't opt in. Folks who opted-in have overdraft fees accounting for about 75% of all their checking account fees, on average -- for an average total of more than $250 per year. That's a lot of money to pay each year for just one kind of fee, and it's money that many consumers can't easily spare.
What to do
So what can you do about these hefty fees? Well, lots of things. For starters, the CFPB is looking into the issue and may come out with new regulations aimed at reining in these fees. In the meantime, though, it has already been urging banks to offer bank accounts tailored to meet the needs of the estimated 10 million Americans who are "unbanked" -- i.e., without a bank account. The CFPB is suggesting that banks offer accounts with no fees for overdrafts -- instead simply declining to process such balance-busting transactions. This would protect the account holder from incurring costly fees while also protecting the banks from shelling out dollars, some of which might not have been repaid.
We consumers have some options, too. We can avoid many overdraft fees by not opting-in to them for our ATM and debit card usage. Opting in does give you the convenience of avoiding declined transactions, but it also sets you up for charges. If you think you're at risk of incurring overdraft fees, don't opt-in -- or, if you've already opted in, ask to opt out. You can also look into linking your checking account with a savings or money market account at the same institution, so that if one account is overdrawn, it can pull funds from another.
You can often save money by being a vigilant consumer. Keep an eye on your bank and the fees it's charging you.