The high cost of opting in to overdraft fees

Starting Aug. 15, consumers using debit cards with insufficient funds will be declined from overdrawing their accounts unless they have elected to “opt in” to their bank’s overdraft program (see charts below).

Following a ruling from the Federal Reserve Board, banks must now acquire “affirmative consent” from their customers to enroll them in an overdraft program. Previously, banks had automatically enrolled their customers, a practice that drew fire from consumer advocates as needlessly expensive.

Consumers who opt out of their bank’s overdraft program will have any ATM and one-time debit transactions declined if they do not have sufficient funds in the bank. For some, withdrawing from an overdraft program protects their bank accounts from fees that can be hard to swallow.

Otherwise, consumers who “opt in” to their respective banks’ program will pay a fee when an overdraft occurs. Opting into an overdraft program yields the benefits that many consumers are already familiar with: Though a fee is charged, transactions can still be processed, which, for many, means bills being paid on time. However, consumers who choose to opt in to their bank’s overdraft program could potentially rack up large charges, depending on how many overdrafts the bank allows and on what conditions.

The new rules could get even more consumer-friendly, if the Federal Deposit Insurance Corporation (FDIC) has its way.

In a letter to financial institutions dated Aug. 11, the FDIC proposed new “guidance” for financial institutions that calls on them to be more proactive in guiding consumers to less costly overdraft choices. For example, it calls on banks to reach out to consumers who repeatedly pay overdraft fees to give them “a reasonable opportunity to choose a less costly alternative.”

The FDIC is particularly concerned about educating consumers who chronically

use overdrafts as “a form of short-term, high-cost credit instead of its intended use: protection against inadvertent overdrafts,” according to an FDIC news release.  The agency said it took action after consumer complaints related to overdraft protection spiked, nearly doubling from 2008 to 2009.

“This guidance proposes common-sense ways to mitigate risks to both consumers and banks. Ensuring that their customers are educated on the appropriate use of overdraft payment programs is just one more example of how community banks understand their customers and play a role in helping individuals find suitable financial products,” says FDIC Chairman Sheila C. Bair in the same release.

Overdraft fees are based on a tiered system consisting of an overdraft fee and a sustained overdraft fee. Below is a table created by the Consumer Federation of America — a nonprofit consumer advocacy group — that lists both fees and their combined total after 10 days from the nation’s 15 largest banks.