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Scared Stupid: Customers Misled into Overdrafts

Only about one third of Americans opted into overdraft protection plans over the past year. That's significantly less than the near 50% that banks had previously claimed -- and the only good news in this story.

By opting in, consumers authorize their bank to enroll them in plans that charge $34 a pop (on average) for the "courtesy" of not warning them when swiping a debit card to buy a $4 latte would exceed their balance and trigger a fee. Most consumer advocates consider these programs such a bad deal that money mavens, such as MoneyWatch's Jane Bryant Quinn, have practically begged consumers to just say no to overdraft protection.

The bad news? The bulk of those who did opt in to overdraft plans were scared stupid, according to a new report by the Center for Responsible Lending. CRL surveyed 916 adults who actively used their checking accounts to find out how many customers chose overdraft protection and why.

Survey findings
The survey found that 33% of consumers opted in to overdraft protection. But the vast majority did so to get services that the plans don't provide.

  • 64% said a key reason they opted in was to avoid bouncing paper checks. In reality, paper checks are not affected in any way by these overdraft plans.
  • 60% said they opted in to avoid fees if their debit card was declined for insufficient funds. But consumers are never charged a fee when a debit card purchase is declined -- not by the retailer, not by the bank.
"We knew that banks were engaging in very aggressive and misleading marketing campaigns to scare people into opting in," said Kathleen Day, a spokeswoman for CRL. "We think that if people really understood what they were getting, they would never sign up."

Bankers contend that it's the CRL survey that's misleading.

"They offered answers that were incorrect, which is misleading," said Nessa Feddis, spokeswoman for the American Bankers Association. "They were confusing, trick answers."

In a minute, I'll provide the actual survey question so that you can decide for yourself whether you think the survey or the banks were the misleading consumers. But, first, a quick recap about what happened with debit cards, overdrafts and "opt-ins."

When debit cards were launched, banks called them "check cards." In trying to get consumers to accept them, they claimed that plastic was more convenient than checks; and debit cards were better than credit cards for fiscally-responsible consumers because they'd stop you from overspending. The notion was that you couldn't run up debt because you could only spend the amount you had in your account.

Unfortunately, consumers believed that banks would not allow them to spend more than they had via debit card long after the industry almost uniformly changed the policy. A few years ago, banks instituted "automatic" overdraft programs that would approve debit card transactions when you didn't have sufficient funds, but charge a double-digit fee for the privilege. These "automatic plans" were disclosed in voluminous fine-print brochures that were mailed to existing customers or provided to them when they opened accounts. Not surprisingly, most consumers considered it junk mail and tossed the disclosure without discovering how significantly their debit card terms had changed.

Nearly overnight, overdrafts became a massive profit center, generating some $37 billion in revenue for the banks.

Consumers, meanwhile, were outraged. Not only did they get no warning when banks extended the "courtesy" of covering a debit charge, they imposed additional policies -- like "re-ordering" checks -- that appeared designed to vastly boost the number of overdraft fees consumers would be charged. (See Big Banks Sneaky New Tricks.) The subsequent outcry spurred proposed legislation and, eventually, an investigation by the primary banking regulator -- the Federal Reserve.

Fed moves
The Fed determined that consumers did want their banks to continue covering paper checks and automatic debits -- like their mortgage and rent payments -- when the customer was short of funds. But they did not want the bank to automatically approve a debit swipe that would cost them $38 for a cup of coffee. At the very least, consumers said they expected a warning when an ATM transaction or a debit card purchase would send their bank balance over the costly edge.

As a result, the Fed instituted a new rule last summer that did three simple things:

1. It prevented banks from charging overdraft fees for ATM transactions and one-time debit card swipes unless consumers affirmatively gave the bank permission to enroll them in the overdraft protection plan. If you do not give permission, the bank cannot charge you an overdraft fee for a debit card transaction. That's likely to mean that they will not approve overdrafts when you use your debit card.

2. It demanded that banks explain the overdraft protection plans and what they cost.

3. It demanded that banks allow consumers to cancel overdraft protection at any time. (In the past, you were automatically enrolled and many banks simply would not allow you to cancel under any circumstances.)

The rule did not change anything with respect to paper checks. In fact, the rule prohibits banks from connecting overdraft coverage for paper checks to the debit-transaction opt-in.

Opt-in notices
The rule caused consumers to receive a flood of mail because banks now need your permission to enroll you in an overdraft plan. But CRL maintains the "opt-in" notices were systematically worded to confuse and frighten consumers into misunderstanding the law. For instance, the notices intimated consumers would face new fees or lose the ability to get overdraft coverage on paper checks if they didn't opt in. Some of the misleading statements banks sent to consumers, according to CRL:

  • "Your debit card may not work the same way anymore, even if you just made a deposit."
  • "Save money by avoiding retailers' returned check fees."
  • The Bounce Overdraft Program was designed to protect you from the cost and embarrassment of having your transactions denied.
  • [failing to opt in] may prevent you from completing everyday transactions, including any store and gas station purchases, emergency home and car repair...purchases when traveling, medical or health emergencies....
That's why CRL conducted the study, says Day. The consumer group wanted to know whether consumers were misled into accepting coverage that they otherwise wouldn't want. If so, the consumer group wants the Federal Reserve to crack down on the misleading advertising.

Who was misleading?
So, back to the question of who misled whom. Here's the exact question that CRL asked of people who said they'd opted into overdraft protection: (Surveyors were told to randomly change the order of the answers.)

How important was each of the following factors in your decision to "opt-in" to overdraft coverage? Please keep in mind that some of these statements may not be true for your bank. Was each very important, important, somewhat important, of low importance, or not a factor at all?
a. You wanted to keep your PAPER CHECKS from bouncing.
b. You were not aware of any other programs to cover overdrafts
c. You didn't want your debit card declined at the check-out counter
d. The bank representative assured you that overdraft coverage was a good idea
e. You wanted to stop the bank from repeatedly soliciting you to accept overdraft coverage
f. You wanted to opt-in just for your paper checks and/or automatic electronic withdrawals, but the only choice was to opt in or out of everything.
g. The bank told you it was free.
h. The fee was reasonable for making sure your transactions were covered.
i. Without overdraft coverage, you still would be charged a fee if your DEBIT card transactions were declined, so at least by opting in, they'd be covered.
Your verdict?
So, gentle reader, what do you say? Was the survey misleading or were the banks? What, if anything, should be done about it?

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