A new study by the Pew Center has revealed that consumers are continuing to pay high fees for debit card overdrafts two years after federal regulators put rules in place to curb this highly profitable practice. In 2011, banks raked in $16 billion in debit overdraft fees. Astoundingly, that is actually a decline of 16 percent from the 2009 peak.
According to the Pew Survey, one in five consumers paid a overdraft fee at some point in 2011, with the vast majority saying the overdraft was a mistake both in terms of the purchase and in their understanding of how their debit cards worked. The card users failed to understand they agreed to incur such charges at the time their debit cards were issued.
Debit Card Overdraft Fees Are Voluntary
When the Federal Reserve revised the rules under which debit card overdrafts can be assessed, the fees are allowed only for customers who have “opted in.” The banks responded with alarming and aggressive marketing campaigns that led consumers to believe if they did not agree to be charged overdraft fees, their cards would be rejected more often and thus of less use to them.
Consumers surveyed said they did not understand what they were agreeing to when they signed their debit card contracts, and at least half said they had no memory of signing such an agreement. Another third said they did not even know the overdraft program at their bank existed until they were presented with the fee.
Banks Insist Consumers Want Their Transactions Accepted
Banks respond to critics by saying that consumers would rather pay the overdraft fee and be given access to funds when they are in need of them. The Pew survey, however, found that 75 percent of those who paid an overdraft would rather their transaction had been denied. Younger card users and the working poor are especially hard hit by such fees, which tend to be levied on consumers under the age of 44 who earn less than $30,000 a year.
Another study on debit card behavior conducted by the Center for Responsible Lending found that 60 percent of consumers opted for overdraft protection believing that they were avoiding fees if their cards were denied. Those fees do not actually exist. By the same token, two-thirds of consumers thought the agreements they were signing were protecting them from bounced checks, which are actually covered by completely separate elements of account agreements.
Federal Regulators Revisiting the Debit Card Fee Issue
These findings, and complaints by consumers, led the Consumer Financial Protection Bureau to open an investigation of overdraft fees in February that will include an examination of how banks are wording the marketing language associated with these programs. If the initial reforms did not go far enough in halting deceptive and confusing language, stronger regulations may result.
The use of debit cards has, for many consumers, replaced the use of checks and physical money. The perception is that when the card is empty, it can’t be used. That may not be true, however, as banks have found a way to earn money from consumers even when their accounts have run dry.
This article was contributed by Suzan Bekiroglu. Ms. Bekiroglu is a published author, freelance writer and editorial consultant for secureloanconsolidation.com. After receiving a Bachelor of Arts degree from the University of South Florida, she faced the mounting obstacle of paying over $24,000 back in student loan debt. Determined to eliminate the debt, she became knowledgeable about money management. She seeks to educate others with tips on managing student loans and other kinds of debt, as well as in general personal finance and money saving tips.