For many Americans, overdraft coverage on their debit cards can seem like a godsend, protecting them from the problem of insufficient funds while shopping.
But a closer look at overdraft fees from the Consumer Financial Protection Bureau (CFPB) finds some troubling trends tied to how consumers' experience the fees.
The transactions that prompt overdraft fees are usually small, considering that the median debit card purchase amounts to only $24, according to a new study from the CFPB. That means consumers may be paying more in overdraft fees -- which can be $30 or $35 -- than for the purchase itself.
Given the relatively steep fees banks levy to cover these small overdrafts, consumers are effectively being charged sky-high interest rates. The bureau said it plans to keep looking into the fees and determine whether more regulations are necessary.
"The result is that some consumers are essentially paying $34 -- which is the typical overdraft fee -- to have the bank spot them less than $24 for just a few days," CFPB Director Richard Cordray said in a statement. "If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent."
Indeed, three-quarters of overdrawn customers reconciled their accounts to positive territory within one week.
The CFPB studied the overdraft charges tied to debit cards because Americans are increasingly using the cards in their day-to-day purchases, especially for impulse or small transactions. Among recent regulatory changes regarding how banks can levy the fees is a 2010 Federal Reserve rule requiring depository institutions to confirm that customers have "opted in" to the services, such as overdraft protection, that incur fees.
The CFPB study found that a small number of consumers are responsible for the bulk of banks' overdraft fee revenue, with 8 percent of banking customers raking up 75 percent of all overdraft fees.
On top of that, the study found that overdraft and nonsufficient-funds fees represent the majority of consumers' checking account fees. For consumers who have opted in for the services with their banks, the overdraft charges make up about three-quarters of their total checking account fees, the study notes.
"Our study also found that nearly one out of five consumers who opt in will likely overdraw their account more than ten times a year," Cordray said. He added that opted-in consumers pay about $260 per year in overdraft and nonsufficient-funds fees, compared with only $35 per year for consumers who haven't opted in.
He added: "I want to take pains to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage. But we need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent."