The solution is for banks to remove the overdraft feature. Period.
Back in 2010, federal regulators responded to public outrage over the “$35 cup of coffee” – the result of a debit card charge that went over by $5 and triggered a $30 fee – by requiring that banks give customers the choice to “opt in” for overdraft service or not. Some consumer advocates called for better disclosure, urging large, bold print in clear language and simple formats so that consumers would make a more informed choice. Four years later, new research by the Pew Charitable Trusts shows that consumers are still paying overdraft fees- now averaging $35- while over half do not remember signing up for that option.
The communities that CRC advocates for are hit hardest.
Overdraft fees take a huge chunk out of people’s pockets. People who pay them usually pay 3 or more and most report that their last overdraft ended up costing them at least $30 , sometimes over $100 to over $200 in fees while their account was negative. Predictably, the communities that CRC advocates for are hit hardest: people who earn under $100,000 are more than twice as likely to pay these fees, and nonwhites are 85% more likely than whites to pay them.
The fees cause a ripple effect: over a quarter of overdrafters go on to close their checking account because of overdrafts, thereby increasing the rate of unbanked and underbanked households who to turn to check cashers and prepaid cards for basic financial services. No wonder the members of our community with the least amount of money to spare- welfare recipients- tend to have an attitude of “we don’t do banks.”
Clearly, requiring banks to give customers the choice to “opt-in” and to provide better disclosure did not reduce the harmful effects of overdraft, so what will?
Most overdrafters say they would rather be declined at the register than be allowed to overspend and charged a $35 overdraft fee.
The simplest answer is this: banks should remove overdraft from their accounts. This is not a pipe dream. Major banks are finally getting the idea that people don’t want bank accounts that will cause them to fall into fee traps. Bank of America, Citibank and Union Bank all have accounts now that either do not allow overdrafts for debit card purchases (the biggest source of these charges) or not at all.
With these options, customers do not have to turn to unregulated products like prepaid cards. Customers can use their debit cards in major ATM networks so they can avoid out of network fees that can also add up. And most importantly, customers can use their debit cards with the security that if they try to buy something without enough money in the account, they won’t get charged a fee because the bank will just decline the transaction.
Simple. Affordable. Safe.
CRC has developed a set of standards for bank accounts called “SafeMoney” that advocates, service providers and everyday people can use to evaluate potential bank accounts. We are using it with welfare administrators and financial education providers to help welfare recipients avoid ATM and overdraft fees all at once. Advocates working to reduce the rate of unbanked and underbanked households should also use it. After all, there is no point to helping someone open a bank account, only to watch them drown in overdraft fees and close their account. No overdraft accounts just make more sense.