As debit cards have become most consumers’ go-to tool for accessing funds in their checking accounts, it’s become easier than ever to accidentally overdraw your account. Banks have responded in two ways: by hiking their overdraft fees and by marketing overdraft coverage services that will allow debit card transactions to go through even if there isn't enough money in the account to cover the charge.
What Do Overdraft Protection Plans Do?
Overdraft protection plans do save customers the hassle and embarrassment of having a debit card transaction declined. By law, however, they are an optional add-on to a checking account. Banks can’t force you to purchase them.
What’s more, banks cannot legally charge an overdraft fee on a debit card transaction unless the consumer has opted into an overdraft protection program. That sounds like a contradiction in terms, but it’s not. Suppose you have a checking account and a debit card tied to it. You have $100 in the account and you attempt to use the card for a $105 purchase. If you don’t have overdraft protection, the transaction will be declined and you will not have to pay an overdraft fee. However, if you have opted into overdraft protection, the transaction will be accepted, but you will have to pay an overdraft fee in addition to the monthly charge for having opted into the overdraft protection plan.
What is the CFPB Doing About Overdraft Fees?
A recent settlement in a case brought by the Consumer Financial Protection Bureau (CFPB) shows how these plans can sometimes be deceptively marketed. The CFPB alleged that TCF National Bank tricked consumers into believing that subscribing to the bank’s overdraft protection services was mandatory for new customers. The bank also allegedly hid the fees it charged for those services.
In settling the government’s claims against it, TCF National Bank agreed to pay $25 million in restitution to consumers who were wrongfully charged overdraft fees and a $5 million civil penalty.
That was not the first or the largest settlement won by the CFPB against banks that didn’t follow the law. In 2015, the agency settled with Regions Bank for wrongfully charging overdraft fees to consumers who had not opted-in for overdraft coverage. The bank refunded $49 million in illegally collected overdraft charges and paid a $7.5 million fine.
Overdraft charges are a significant profit center for the consumer banking industry. The CFPB found that in 2015, banks with more than $1 billion in deposits took in $11.6 billion in overdraft fees, a figure that accounted for 5.5% of those banks’ pre-tax profits.
ConsumersAdvocate.org reviews and recommends banks that offer checking accounts and other financial services. But as the CPFB’s settlements with Regions Bank and TCF National Bank suggest, it’s important to do your homework before entrusting your money to any bank or financial institution. If you want overdraft protection, compare plans and prices just like you would with any other financial service. But if you don’t want it, you do NOT have to buy it.