If a US consumer makes a purchase at a local store and wants to use her debit card, but there are not enough funds in the account to pay for the purchase, the bank can decline the transaction, or allow the customer, for a fee, to be extended credit in order to avoid an overdraft, or to transfer money from another account to cover the shortfall.  A recent study concluded that consumers are confused about the overdraft options available to them.

Overdraft protection programs can be a reliable revenue center for banks.  Long gone are the days when banks as a courtesy to customers would transfer funds from another account to allow the customer to conclude the transaction.  Current regulations require a customer to affirmatively opt-in to overdraft protection in order for the bank to assess the penalty fees; prior to the regulation, some banks had been requiring customers to opt out of these programs.

Study Shows Continued Confusion

In a study released in June 2014 by the Pew Charitable Trusts (Pew Trusts), an independent non-profit organization, the Pew Trusts discussed the results of its detailed survey of persons who incurred an overdraft in 2013 as a result of using a debit card.  Among the findings was that consumers still are confused about their options when it comes to overdraft protection programs, with a large number of consumers reporting that they do not remember having opted-in to such a program.   The study also found that a large majority of consumers who have paid overdraft fees would instead prefer to have a transaction declined.  Moreover, many consumers also are concerned that banks may be implementing these programs so as to maximize their fees, such as by reordering transactions so that the largest amount is debited first, which can increase overdraft charges.  In 2011, almost $6 billion in overdraft fees for automated teller machine and debit cards was collected by the banks.

Specific Remedies Suggested

The Pew Trusts urged the Consumer Financial Protection Bureau (CFPB) to require banks to provide clearer disclosures to consumers about overdraft protection programs so they can make an informed choice on whether to participate.  At the same time, it also urged the CFPB to prohibit a bank from reordering a customer’s transactions in order to maximize its fees for the ensuing overdrafts.

Access the study, “Overdrawn: Persistent Confusion and Concern About Bank Overdraft Practices.