Most banks and credit unions cover customers’ checks that exceed the amount of money in their accounts and charge a "courtesy” overdraft fee. What they don’t tell customers is that those fees have become a major revenue source for many financial institutions.
Since 2005, the national average for overdraft fees has jumped from $27.04 for each instance to $28.95, according to Bankrate.com. U.S. banks this year could rake in $38.5 billion in overdrafts fees, according to the research firm Moebs Services. About 75 percent of banks sign up customers automatically for the service, a Federal Deposit Insurance Corp. study reported.
For consumers, the manner in which banks handle overdraft payments can be just as important. The FDIC says about one in four banks submit large checks first during nightly processing, depleting the check-writer’s account, which can trigger multiple fees for smaller checks that follow.
"You’re trying to gouge the customer at that point,” said one area banker who asked not to be identified.
Banks contend that overdraft protection allows customers to avoid other fees and potential criminal penalties associated with bounced checks, and the fees compensate the bank for risks involved in covering the bad checks. Consumers can opt out of the service at nearly all banks, and often can sign up for cheaper services such as automatic transfers from a linked savings account to cover insufficient funds.
But consumer advocates claim some overdraft fees and practices go too far.
Jennifer Wallis, vice president of Consumer Credit Counseling of Oklahoma, said the banks’ courtesy fees "are not that courteous” when a customer writes a series of bad checks.
"Payday lenders catch a lot of flack about how high their interest rates are, but when you annualize some of these fees that banks are charging, they’re as high as payday loans,” Wallis said.
A bank charging a $27 fee to cover a $20 purchase made from an overdrawn account is loaning money at an annual percentage rate of 3,520 percent if paid back in two weeks, the FDIC said.
Oklahomans pay less
Each Oklahoma household with a checking account paid an average of $257.32 in overdraft fees last year, according to an analysis by Bretton Woods Inc. That’s below the national average of $342.93. In 2008, Oklahomans paid $313 million in fees associated with not-sufficient-funds transactions, according to the Bretton Woods analysis.