Fees. No consumer is excited to see that word relative to any product in which he or she is interested. In regards to the banking industry, the potential fees a given consumer might face are many and varied, from maintenance fees to ATM fees to minimum balance fees to fees for overuse of your account in a given time period for starters.
Two of the most commonly charged banking fees are the Overdraft Fee (OD) and Nonsufficient (Insufficient) Funds Fee (NSF). Many consumers consider these fees one and the same, and many financial institutions practically treat them as such, but a difference technically exists. An overdraft fee is charged when an account lacks the funds to pay a debit levied against it – e.g., a check written that is larger than the balance of the account – and the institution covers the overdraft. Hence, "Overdraft Fee," otherwise commonly called a "Courtesy Pay" fee for the courtesy of covering the overdraft amount. This fee is not to be confused with the overdraft transfer fee (which we will touch on later in the article); this is simply the fee charged for overdrawing an account, the amount of which is covered by the bank.
Banks limit how much they will cover in overdraft protection, but it varies by institution. In some cases, extra fees may also be charged if the account remains overdrawn. This sort of protection costs the consumer a fee paid to the bank; but, since the debit is paid, it saves him or her a returned-check fee (and potentially some embarrassment and additional hassles) from the original recipient.
An NSF fee, like the OD fee, comes on the heels of a debit that overextends an account. The difference is that the debit is not paid with NSF as it is with OD. This type of transaction is colloquially known as a "bounced check." If a consumer has opted out of overdraft protection (more to come on this) or has exceeded the limits of said protection, a check written by that consumer for which the account has insufficient funds is returned unpaid to the original recipient’s bank. The consumer’s financial institution charges him or her a fee for having written a check from an account that had nonsufficient funds. Hence, "NSF Fee." As we’ll see subsequently, this amount is, in practice, often very similar or even identical to the OD fee.
Within most financial institutions, incurring one of these fees in the case of any overdraft is unavoidable. The consumer will either be met with an OD fee after the debit is covered or an NSF fee in the case that it is not. For a consumer consistently managing low account balances, even the slightest misjudgment or miscalculation of balances could be costly.
The Evolution of Overdraft
Overdraft protection came about as a way to curb bounced checks, saving account holders from returned checks or refused recurring electronic payments and the accompanying fees from their recipients. Of course, a fee from the account holder’s financial institution was still to be expected (as there would have been with an NSF transaction), but overdraft protection, at least, saved them from extra fees incurred from recipients of insufficiently funded payments.
Banks and credit unions even began to set up programs for account holders through which a checking account could be linked with a savings or money market account or even a line of credit from which the overdrawn amount may be pulled to cover the shortfall. Of course, an OD transfer fee was levied for the automatic coverage, but it was substantially smaller than an OD fee, averaging in the $5-10 range. Over time, that sort of protection could save an account holder a great deal of money.
Eventually, however, overdraft protection moved beyond checks and electronic payments and began to be applied to ATM withdrawals and debit card transactions. Banks could enroll account holders in overdraft protection without their permission. As this article points out and the following chart illustrates, the revenue from overdraft fees was a steadily climbing income source with no end in sight:
In response to the rising costs of overdraft fees and their effect on consumers, overdraft protection was addressed as a part of the larger 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in response to the financial crisis of 2007-2008. One of the major changes made by the bill was to require financial institutions to inform consumers of their overdraft protection policies and attain their consent before employing overdraft protection on their debit card and ATM transactions as of August 15, 2010. In other words, account holders would have to "opt in" to overdraft protection plans by which they might incur penalty fees. Consumers who "opted out" of such coverage would simply have any transactions that would overdraw an account denied at the point-of-sale. Note that the regulations applied only to debit card and ATM transactions. Banks were still allowed to charge overdraft protection fees on bounced checks or recurring electronic payments that overdrew an account without requiring them to opt in to that protection.
Whether or not the Dodd-Frank bill spurred any lasting change is debatable. This Pew study from 2012 shows that nearly one-fifth (18 percent) of consumers incurred an overdraft fee within the previous year, with lower-income (< $30,000)="" and="" younger="" (18-35="" year="" old)="" consumers="" hit="" the="" hardest="" by="" the="" penalties.="" over="" half="" (54="" percent)="" of="" those="" who="" received="" a="" penalty="" reported="" overdrawing="" between="" two="" and="" five="" times,="" while="" 14="" percent="" reported="" overdrawing="" between="" six="" and="" ten="" times.="" of="" those="" same="" respondents,="" 23="" percent="" reported="" paying="" extended="" overdraft="" penalty="" fees="" after="" not="" paying="" back="" the="" negative="" amount="" plus="" the="" original="" overdraft="" fee="" quickly.="" those="" penalties="" add="" up,="" and="" 35="" percent="" of="" respondents="" reported="" closing="" their="" accounts="" as="" a="" result="" of="" mounting="">
Despite the new regulations, 54 percent of consumers who overdrew reported that they did not know they signed up for overdraft protection. A whopping 75 percent of those same people reported that they would rather have a transaction declined than to pay an overdraft fee (which is interesting seeing that some banks actually advertise OD protection as a way to "avoid the embarrassment of a declined transaction"). Consumers complained that the information on overdraft protection from their financial institutions was either not readily available or unclear, leading to unexpected penalties.
A more recent and slightly expanded study conducted by Pew in 2014 revealed little to no change since the first study. Surveying consumers regarding their experiences with overdraft protection in 2013, the researchers concluded that "younger, lower-income, and nonwhite account holders, as well as those who did not have a credit card, are among those who were more likely to pay an overdraft penalty. More than half (52 percent) of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage.
10 percent of Americans paid at least one overdraft penalty fee in 2013, and another 5 percent paid an overdraft transfer fee. On average, people who paid an overdraft penalty also incurred additional fees, for a total of $69 the last time their account was overdrawn. 13 percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees…[68 percent] of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account."
One final statistic from the Pew study was that 80 percent of those who experienced an overdraft penalty say that overdraft penalties and practices should be more closely regulated. Pew agreed, recommending that further public policy changes be instituted, including provision of "clear, comprehensive, and uniform pricing information for all available overdraft options" to all account holders and making overdraft fees reasonable and relative to the cost of covering them.
A New Bureau
The Consumer Financial Protection Bureau (CFPB), the organization that oversees such policy changes, was another result of the 2010 Frank-Dodd bill. As the name implies, the CFPB gives oversight to consumer protections in the financial sector. The bureau was created to oversee the implementation of policies in the Dodd-Frank bill and the creation and implementation of further policies deemed necessary to protect the general public operating in the financial sector.
In partnership with several other agencies (by way of the FFIEC), the CFPB implemented a change in the quarterly reporting practices of banks. As of 2015, banks with more than $1 billion in assets began itemizing certain fee categories, including OD and NSF fees. The data from the reports of those 628 banks subject to the reporting requirements revealed that OD and NSF fees totaled $11.6 billion in revenue for the banks, which is almost two-thirds of all the reported consumer deposit account fee revenue. In response to the continued growth of and consumer complaints about overdraft and NSF fees (nearly one-quarter of the bank account and service complaints on the CFPB site are OD- or NSF-related), the CFPB is working toward further regulations and settled the first enforcement of the 2010 opt-in rule in April 2015.
How to Avoid Overdraft Penalties
More than 50 percent of the respondents in the 2014 Pew study paid between $30 and $100 per overdraft, including extended fees for remaining overdrawn too long. 53 percent reported that they did not learn about their overdraft for 2 or more days, many of which were made aware through a paper statement in the mail. Considering then that limits for the number of OD or NSF fees that may be charged in a day are regularly three to four and might even go north of 12, a consumer caught unaware could suffer quite a mounting burden of debt by way of penalties before they even knew what was happening. It is important to take precautions in order to avoid those fees, and any number of sites, including that of the CFPB, offer ideas for effectively doing so. We’ve added here a summation of some of the most practical and helpful recommendations:
- The first and most obvious way to avoid these fees is to keep a close eye on checking account balances, and sign up for low balance alerts from your financial institution, if they are offered. Many of the account holders researched in the Pew studies overdrew their accounts simply because they were not paying close enough attention and did not ensure that enough money was in the account to cover a debit. If it is impossible to keep enough money in the account, move to cash or prepaid cards.
- Second, opt out of automatic overdraft protection, opting for a declined transaction when funds are insufficient, instead. Though a declined debit or ATM card transaction can be frustrating, it can save the account holder a good bit of cash.
- Third, link your checking account to a savings or money market account or line of credit from your institution. If your checking account balance is too low to cover a debit, the bank will automatically tap the linked account to cover the shortfall and charge a much smaller transfer fee.
- Finally, search out and switch to an account that does not authorize overdraft protection. Keep in mind, though, that such accounts may still carry NSF fees, so do your homework, and always keep an eye on your balance.
Where to Find the OD or NSF Fees
These fees, unlike the Early Withdrawal Penalties we previously addressed, are usually pretty simple find. Many banks display them within the account information on their websites. If not, a simple phone call or chat message with a CSR can uncover the information you need very quickly.
Similar to the aforementioned EWP information, OD and NSF fees may also be found in a couple of places on our website. These fees are part of the information we track where available on checking accounts. The first place they may be found is within the individual product listing on our checking accounts table (links to the checking accounts table can be found in the top menu bar on the site). After clicking on the table offering a desired product (example: Personal Checking Accounts), the table will open, displaying a list of the top rates for that product category along with the "Details" button on the right side of each product. This button will expand the view, offering more detailed information on the selected product. Here is an example of an expanded ‘details’ view for an individual checking product listing for which we are tracking OD and NSF information (notice the information outlined in red in the below screenshot):
OD and NSF information is also available on the checking products listed within the individual institution "hub pages" for each bank and credit union. Among other ways, these institution hub pages may be found by searching for the institution’s name in the search box in the top right of the site. The institution hub page contains dedicated institution-specific information including an institution overview, links to previous blog and forum posts pertaining to that institution, user reviews, a proprietary health rating, location information, and information about that institution’s products offered and current rates. When available, OD or NSF information may be found by expanding the details of each of the individual checking products listed within the rates section of the institution’s hub page. The following image is from the page dedicated to FNBO Direct:
In the next article, we will dig into more specifics and look at individual accounts to compare OD and NSF fees in order to find some of the most consumer-friendly accounts and overdraft protection policies.