Pew Releases 2nd Report on Consumer Experiences With Overdraft

WASHINGTON—The Pew Charitable Trusts released a report today on its second survey of checking account holders and their experiences with overdraft. The survey found that many consumers still express confusion and disapproval about bank practices and the rules surrounding them. Despite federal requirements that consumers must agree to debit card overdraft coverage before any fees are charged or services are provided, Pew’s survey finds that more than half of those who incurred a debit card overdraft penalty fee do not believe they ever opted in to the service. This finding indicates that consumer understanding of overdraft has not improved since Pew’s first survey on the issue in 2012. 

“Checking accounts are the most widely used financial product in the country, yet many consumers are still concerned and puzzled by bank overdraft practices,” said Susan Weinstock, who directs Pew’s consumer banking research. “Overdraft protections shouldn’t be a guessing game. We urge the Consumer Financial Protection Bureau to write new rules to make overdraft programs safer and more transparent.” 

The report, Overdrawn: Persistent Confusion and Concern About Bank Overdraft Practices, finds that in 2013 ten percent of Americans paid at least one overdraft penalty—a fee in exchange for a short-term advance to cover a transaction. An additional five percent paid an overdraft transfer fee, which is charged for moving money from another account. 

“Overdrafters,” defined as consumers who had paid an overdraft penalty in the past year, reported paying an average of $69 in fees the last time their account was overdrawn. Younger, lower-income, and nonwhite account holders, as well as those who did not have a credit card, were among those who were more likely to pay an overdraft penalty. 

Other findings include: 

• 13 percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees.
• More than three-quarters of the people who paid an overdraft penalty express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging “extended” overdraft fees—additional charges for failing to repay a negative balance on time—and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees.
• Large majorities of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account, and they support greater regulation of overdraft products.

The survey expands on Pew’s 2012 report, which focused solely on overdrafters, by interviewing three additional groups of respondents: “transferers” (those who paid an overdraft transfer fee for a debit card transaction), “decliners” (those who had a debit card transaction declined instead of paying an overdraft fee), and “never-negatives” (those who never completed a debit card transaction that would result in a negative account balance). 

All four consumer groups surveyed expressed similar concerns about overdraft policies, in spite of their differing experiences.

As in the 2012 survey, Pew continues to make the following policy recommendations to the Consumer Financial Protection Bureau to improve overdraft protections by requiring banks and credit unions to: 

• Provide account holders with clear, comprehensive, and uniform pricing information for all available overdraft options.
• Make overdraft penalty fees reasonable and proportional to the bank’s costs in covering the overdraft.
• Prohibit the process of reordering transactions to maximize fees, and post deposits and withdrawals in a fully disclosed, objective, and neutral manner.

To conduct this study, Pew commissioned a nationally representative survey of American adults to ask about their experiences with debit card and ATM overdraft and explore account holder knowledge, understanding, and attitudes about overdraft fees. 

The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life.