November 16, 2010
Large Majority of Consumers Want Right to Choose Whether to Be Covered by Fee-Based Overdraft Programs for Checks
Two months after new federal regulations started requiring banks to get their customers’ permission before signing them up for costly debit card overdraft programs, a national poll by the Consumer Reports National Research Center has found that only one-fifth of consumers holding an ATM or debit card have chosen to opt-in.
The poll found that 22 percent have signed up to have their ATM/debit card transactions covered for a fee if they don’t have enough money in their checking accounts to cover them. A large majority of poll respondents said they wanted the same right to choose whether to be covered by fee-based overdraft programs for check transactions.
“Now that banks are no longer allowed to automatically enroll customers into high-cost debit overdraft loan programs, the vast majority of consumers are saying ‘no thanks.’” said Pam Banks, Senior Policy Counsel for Consumers Union, the nonprofit publisher of Consumer Reports. “Consumers shouldn’t opt-in to high-cost overdraft loan programs because there are more affordable options available when checking account funds fall short. Bank customers should have the same right to choose when it comes to overdraft programs covering checks.”
Of those consumers who signed up to have debit card or ATM transactions covered for a fee, the poll revealed that 55 percent had experienced an overdraft in the past six months.
This finding is not surprising given the aggressive and oftentimes misleading “opt-in” marketing tactics many banks target at customers who overdraw their accounts. These marketing materials often drive customers to high-cost coverage while failing to market cheaper alternatives.
Thirty-nine percent of those who had overdrafted their account in the past six months chose not to sign up for such coverage.
Seventy percent of consumers responding to the Consumer Reports poll said they would like to have the choice when it comes to whether their bank covers the checks they write for a fee when they do not have enough money in their accounts to cover them. About half of these respondents – or 47 percent – indicated that they would select this option. Over one-third – or 38 percent – said they would decline to do so.
Consumers Union noted that there are cheaper alternatives for consumers when it comes to covering overdrafts triggered by debit cards or checks. Most banks allow customers to link checking accounts to a savings account, credit card, or a line of credit. When an overdraft occurs, the bank will automatically transfer money to cover the transaction from the linked account. The FDIC has concluded that the fees assessed for these other types of programs are significantly lower than for automatic overdraft loan programs.
The fact that customers who opted in are more likely than not to have recently overdrawn their debit card accounts confirms that many customers remain exposed to excessive overdraft fees and unfair practices, and underscores the need for meaningful substantive reforms.
The FDIC is currently considering a proposed guidance on overdraft programs for small state chartered banks that recommends that consumers be given the right to “opt-out” of overdraft coverage for paper checks and electronic payments. Consumers Union and other consumer groups have urged the FDIC to go further and require banks to get their customers’ permission before charging fees for such coverage. The groups also recommended that consumers who want overdraft protection should be offered the least expensive form of overdraft coverage for which they qualify.
A federal judge in California recently ruled that Wells Fargo gouged consumers by manipulating the order it processed transactions, which triggered more overdrafts and generated more costly fees. The FDIC’s proposed guidance would put an end to this practice for the state-chartered banks it supervises. Consumer groups recently urged the Office of the Comptroller of the Currency to take similar action with respect to the banks it supervises and to require banks to offer consumers the lowest cost overdraft option available to them.
The Consumer Reports National Research Center conducted a telephone survey of a nationally representative probability sample of telephone households. 1.014 interviews were complete among adults aged 18 or over. Interviewing took place over September 30-October 3, 2010.