Overdraft Protection Plans Continue to Grow

CU360
May 14, 2007

Having trouble keeping up with all those debit receipts? Apparently, most of us who have switched from the checkbook to a debit card aren't keeping our accounts up to date.

About 60% of bank customers never balance their checking accounts. They're not clueless—they're just strapped for time. Members and customers have a steady stream of information about the status of their accounts, but it seems time is sometimes more important than money.

In the year 2000 alone, U.S. consumers wrote about 400 million individual non-sufficient fund items, and paid more than $8.2 million in related fees, reports Community Banker magazine. In 2003, one analyst estimates that consumers paid $33 billion in NSF and overdraft fees to all depository institutions.

As balancing one's checkbook becomes a lost art, members and customers increasingly rely on services that cover them from the cost, embarrassment, and inconvenience of bounced checks. In various forms, overdraft protection can provide access to a line of credit, recourse to a deposit account or credit card, or payment of a fee for overdrafts.

Not So Fast . . .

Now that electronic transactions exceed paper checks, "banks have found a new way to maximize the revenue from bounced checks by permitting consumers to overdraw accounts electronically at the ATM, using a debit card at a retailer's point of sale, and through preauthorized debits," says a report from the Consumer Federation of America (CFA).

In its 2005 study "Overdrawn: Consumers Face Hidden Overdraft Charges from Nation's Largest Banks," CFA cites industry reports that electronic transactions have contributed to the doubling of overdraft volume in the past 10 years, and notes that "consumers are unable to respond fast enough on the deposit side to keep up with the faster velocity of transactions that withdraw funds from accounts."

Who Is the Overdraft Customer?

The notion that it's someone who is financially irresponsible, or who lacks the sophistication to understand the costs involved using overdraft protection, is simply wrong. These programs affect homeowners, renters, blue collar, white collar, young, and old, say industry observers.

But, counters CFA, overdraft fees do not fall uniformly on members or customers. "The depositors who most frequently face these fees are the lowest income and youngest consumers. High overdraft fees can also have a much higher impact on moderate-income consumers and African American consumers," according to CFA's study. In a 2004 poll, consumers who state they overdraw their accounts and are most likely to pay overdraft and bounced-check fees were moderate-income consumers with household incomes of $25,000 to $50,000 in the range of 25 to 44 years of age.

In some markets, it may be difficult to point to one primary group that uses overdraft protection, according to Jeff DeYoung, vice president of marketing at $452 million-asset First United Bank in Crete, Ill. First United recently added an overdraft protection program and claims that the program does not affect any one group more than other.

Overdraft protection programs have become an important source of fee income, and DeYoung's bank saw an increase of 120% in fee income after introducing its overdraft protection program.

Call it a service or just another way to generate fee income, consumers are perhaps best protected by understanding how their accounts work. The Federal Reserve Board provides a consumer-oriented review of overdraft protection on its website.

This story was published by CU360 at cu360.cuna.org and is reprinted with permission.