The following post is from our analyst, Rodney, and is part of an ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary database of depository rate and product data.
We previously presented an overview of Overdraft ("OD") and Nonsufficient Funds ("NSF") fees, including a review of public policy changes over the last several years that have affected them. In this article, we will explore more of the specifics of these fees, compile national averages, and make a few comparisons along the way. We will also try to pinpoint some interesting and/or favorable examples of how banks and credit unions handle these fees for their customers.
Just as in previous research articles, we compared products according to both the size and type of institution from which they came. By institution "type," we mean brick & mortar (B&M) banks, credit unions, and Internet banks. By institution "size," we mean small, medium, or large, where ‘small’ is any institution with less than one billion dollars in total assets, ‘medium’ is any institution with assets between one billion and twenty-five billion dollars, and ‘large’ is any institution with greater than twenty-five billion dollars in assets.
As we mentioned in the previous article, OD and NSF fees are usually the same dollar amount per transaction within a given financial institution, apart from a small number of exceptions. In fact, many institutions specify only one type of fee and use it for either situation, rendering comparisons of both products redundant. Therefore, we will use the "overdraft" terminology throughout this article, but keep in mind that it is being used interchangeably for the purposes of this broader data study.
With that in mind, a comparison of those fees according to institution type yielded the following results:
As we have seen with previous data inquiries, the most consumer-friendly products were offered by Internet banks, whose fees were lower than B&M banks by about 18 percent. As expected, credit unions also outperformed B&M banks, but by a smaller margin of only eight percent.
Likewise, results similar to past data arose when comparing OD fees by institution size:
The institution size comparison yielded a difference of about eight percent between the largest and smallest average fees. Smaller-sized institutions–as in the past–produced more consumer-friendly average fee structures than the larger institutions, and medium-sized institutions fell just between those averages.
Across all institution types and sizes, we calculated the average OD fee to be just over $30 per transaction ($30.50, to be exact). Yet, looking through the aggregate data, we found some outliers. Our research revealed that not all OD fees conformed to the mold, and we will take a closer look at some of the more interesting fee structures in a moment. The non-conformist fees are certainly a minority as this distribution chart demonstrates:
As the chart reveals, the vast majority of OD fees fall between $25 and $35. Though materially higher and lower fees are offered by some institutions, they are certainly not the norm.
Specific OD Fee Structures – Examples
For consumers, obviously, the lower the fees, the better. In our research, we found some very interesting options. Unfortunately, however, as is often the case, one particularly positive attribute on a given account means a catch elsewhere. The following is a list of a few examples of the zero overdraft fee checking accounts that dot the landscape of consumer options and the catch that accompanies them:
- First Clover Leaf Bank offers a checking account with zero overdraft fees, but it is accompanied by a paltry .05 percent APY.
- Visions Federal Credit Union offers an account with no overdraft fees and a much higher APY of .50 percent. However, the account requires a minimum balance of $10,000 and actually charges a fee for anything less than a $25,000 balance. It’s not too hard to waive OD fees when you have those requirements in place!
- SunTrust Bank offers a checking account with no OD fee for up to three transactions within a rolling 30-day period ($36 thereafter); however, the account requires a minimum balance of $25,000 to avoid a monthly service charge and returns only .01 percent APY.
- Comerica Bank offers an account with no OD fees, but the APY for a balance less than $100,000 is .03 percent, while anything over that mark carries an only slightly improved .05 percent APY.
Lest the news be all negative, MyCBB, an online bank, is a rare example of an institution that offers a free checking account with a very competitive .61 percent APY and no OD fees.
More Than a Flat Fee
Various financial institutions offer graduated fee systems based on dollar amounts of the OD, the number of ODs, or some combination of both. Though such a method or a simple flat fee are the most common by far, many institutions have become more creative with their fee structures. For instance, KeyBank takes an interesting approach to overdraft penalties, offering a graduated fee system according to both the number of ODs and the amount of a given OD. The first two overdrafts in a given month have the fee waived, as do any thereafter that overdraw the account by $10 or less. That can be a helpful system because, as the Pew Research we noted in the previous article states, nearly one quarter of overdrafts are for amounts of $20 or less. Following the first two ODs in a month and for those greater than $10, KeyBank only charges $18, which still beats the national average OD fee by nearly 41 percent.
Some institutions offer a set number of overdrafts per month with no fee, while others refund a charged fee the following month if only one OD occurs within that time period. Others will waive fees when the account holder has reached a certain "level" of membership or collected a particular amount of reward points or the like. Still others offer a certain number of OD occurrences per year that are forgiven. One final unique approach to OD penalties we will mention is that of Harborstone Credit Union, who offers a free automatic transfer service from another account for the first six ODs in a month, which leads us to another factor in the OD conversation.
We briefly mentioned overdraft transfers in the previous article, so we will dig into some of the specifics of that attribute on these accounts, as well. By way of reminder, overdraft transfers are a service many financial institutions offer that ties a customer’s savings account, MMA account, or line of credit to his or her checking account in order to automatically cover any overdrafts that may occur within that checking account. When an overdraft occurs, it is covered out of the balance of the partner account. Of course, most institutions charge a fee for these transfers, but it is normally a fraction of the average OD fee, coming in at only $5.54 on average.
The vast majority of OD transfer fees fall between no charge and ten dollars per transaction, as you can see in the following distribution chart:
Overdraft Transfer Fee Structures – Examples
Just like the OD fees above, overdraft transfer fees vary between institutions. Some offer OD transfers as a free service, as you can see in the distribution chart. Most, however, charge some sort of fee, ranging from as low as $.50 to as high as $20, in rare cases. The fees may be equally as diverse as the overdraft charges, yet carry lower dollar amounts, on average. For instance, American Heritage Federal Credit Union offers six free overdrafts per month followed by a $10 charge for OD transfers, as opposed to the more than $25 OD fee they would charge otherwise. Comerica Bank (also referenced above) utilizes a tiered system, charging seven dollars for the first through fourth occurrences, $12 for the fifth through seventh occurrences, and $16 for occurrence number eight or greater. Tennessee Valley Federal Credit Union charges five dollars, three dollars, one dollar, or none depending on the level of membership the account holder has attained. Likewise, Capital Credit Union waives their normal three dollar OD transfer fee when the account holder signs up for electronic account statements.
Transaction Order Makes a Difference
The structure of overdraft fees and transfer fees are not the only variables to consider as it pertains to the overdraft process. The order in which a financial institution posts transactions to an account can change the number of overdrafts in a given situation, which affects the amount of money the account holder will be charged in fees. According to this 2013 study by the Consumer Financial Protection Bureau (CFPB), financial institutions generally follow a standard practice of processing deposits before withdrawals during nightly processing. This practice increases the likelihood that an account will have sufficient funds to cover any debits that occurred the same day, thereby avoiding an OD or NSF fee.
The order in which debits are processed, however, is another story. Individual financial institutions–even different branches that are a part of the same bank, in some cases–decide the order in which they process the debits on an account. In fact, no two banks that participated in the CFPB study followed identical posting procedures. Some banks process debits in a way that is advantageous to the account holder, while others practice a method that maximizes fee income for the bank.
Let’s say, for example, an account holder has $30 in his account at the beginning of the day. He starts his morning with a $5 expenditure on a fancy latte from the local coffee shop. Later that day, he joins a client for a quick burrito from the food truck on the corner, which costs him $10, leaving only $15 in his account. On the way home from work, he stops by the store to pick up a few necessities, spending $25 in the process and pushing his account into the red. On his way toward the exit door, however, he spots his favorite snack and turns around to make one final purchase of $3. Depending on the order a bank processes the transactions, the account holder faces either one, two, or three OD or NSF fees.
Consumer- or Bank-Friendly Processing?
Bank 1 may withdraw the funds in order that he shopped, charging two OD/NSF fees for the groceries and snack. Bank 2 may withdraw the funds from largest to smallest, which would cost the account holder three OD/NSF fees for lunch, his morning cup of joe, and his evening snack (hopefully, it was a really great snack). Bank 3 may withdraw the funds from smallest to largest, charging only one OD/NSF fee for the groceries. The process used by Bank 3 is obviously more consumer-friendly than the other two; therefore, banks that follow such a process often openly advertise that they do.
Even so, the smallest details, like the order in which a bank processes withdrawals and deposits can make a big difference. In the example above, assuming the average OD fee amount from the charts above, it is the difference between $30.50 and $91.50 in fees. Even if our esurient account holder had realized his mistake during the day, depending on when his bank processes debits on his account (end-of-day vs. immediately), he may not have been able to do anything to correct it. Wise consumers pay close attention to the details, even the smallest ones, on every account, because they understand the difference each one can make over time.
Just in Case…
We recognize that our savvy readers are generally not overdrawing their accounts and thus aren’t choosing checking accounts based on overdraft fees and available protections. In fact, according to the same Pew Research mentioned above, only 10 percent of respondents paid an overdraft fee in the past year, while another five percent paid an overdraft protection transfer fee. Understanding the structure of your institution’s fees, however, can help you protect yourself in case something goes awry and an overdraft occurs. You can use our customizable free checking account list to find the accounts with the lowest fees for the way you bank.