U.S. PIRG Consumer Blog: FDIC issues mammoth study of overdraft fee programs

A massive new FDIC study confirms that most (77%) large banks are offering "automated" (you don't sign up, it's a "feature") overdraft or bounce protection programs and accruing billions of dollars in revenue. The programs have been heavily criticized by nearly every major consumer and civil rights group, including PIRG. In the 110th Congress, remedial overdraft fee legislation offered by Rep. Carolyn Maloney (D-NY) languished in committee due to fierce opposition from the banks.

Here are a few selections from the executive summary, confirming what we already know (that these these programs are unfair, tricky, and make lots of money for the banks at the expense of younger, less-well-off consumers):

Aggregate data from over 1,000 banks:

Most banks (75.1 percent) automatically enrolled customers in automated overdraft programs...By contrast, almost all banks (94.7 percent) treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts linked. [Blogger note: Linked-account programs are cheaper and fairer to consumers.]

Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth of the surveyed banks (24.6 percent) also assessed additional fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.

Fees assessed for linked-account and overdraft LOC programs were typically lower than for automated overdraft programs.

The majority (81.0 percent) of banks operating automated programs allowed overdrafts to take place at automated teller machines (ATMs) and point-of-sale (POS)/debit transactions. However, most banks whose automated overdraft programs covered ATM and POS/debit transactions informed customers of an NSF only after the transaction had been completed (88.8 percent of banks for POS/debit transactions and 70.7 percent of banks for ATM transactions).

A significant share of banks (24.7 percent of all surveyed banks and 53.7 percent of large banks) batched processed overdraft transactions by size, from largest to smallest, which can increase the number of overdrafts.

...90 percent of total NSF related fee income earned by the entire study population [came from the automated bounce protection programs, not from the more consumer friendly linked account or other OD programs.]

Drill-down data from a smaller sample of 30 banks:

Almost 9 percent of consumer accounts of banks reporting data had at least 10 NSF transactions during the 12-month period of analysis.

Customers with 5 or more NSF transactions accrued 93.4 percent of the total NSF fees reported for the 12-month period. Customers with 10 or more NSF transactions accrued 84 percent of the reported fees. Customer accounts with 20 or more NSF transactions accrued over 68 percent of the reported fees.

Accounts held by customers in low-income areas (in some areas, median annual income of less than $30,000) were more likely than accounts in higher-income areas to incur overdraft charges.

Almost half (48.8 percent) of all reported NSF transactions took place at POS/debit (41.0 percent) and ATM (7.8 percent) terminals.

You get the idea. There's a lot more in the study and its accompanying exhibits.