Consumers continue to report being hit with unfair multiple overdraft fees, with banks and credit unions using this policy to get additional profits, according to a Pew study. Multiple overdraft fees can compound faster than the consumer realizes, depending on the financial institution’s overdraft policy and financial state of the consumer.

Multiple overdraft fees can stem from the use of debit cards, automated clearing house (ACH) transactions, ATM, checks, and other transactions that further put the consumer’s checking account over the line.

Overdraft protection was originally designed to help protect consumers against embarrassing occurrences of card decline, as well as to discourage consumers from any spending behavior that might overdraw their accounts.

Under most overdraft protection policies, when their primary checking accounts become overdrawn, the bank or credit union then advances funds to cover the transaction for the consumer. However, overdraft fees and other insufficient fund fees incur from this service at an average of $35, which the consumer can pay at a later date.

Even though overdraft protection started out as a way to help prevent consumers from overdrawing their accounts, banks and credit unions have been allegedly abusing this policy against financially vulnerable customers by hitting them with multiple overdraft fees.

This became so bad, according to reports, that the federal government implemented regulations regarding overdraft protection on Aug. 15, 2010. The new regulations require customers to opt into overdraft protection programs.

Overview of Overdraft Protection Problems

According to the Consumer Financial Protection Bureau (CFPB), consumers who incur multiple overdraft fees per year have most likely overdrawn their accounts by using debit cards, checks, and ACH transactions.

In addition, the Pew Charitable Trusts’ chartbook  entitled “Heavy Overdrafters: A Financial Profile,” shows that heavy overdrafters tend to be lower income consumers that are forced to give up almost a week’s worth of their household income to overdraft fees.

However, it should be noted that these multiple overdraft fees may not be entirely the consumers’ fault. Some banks and credit unions have been accused of processing transactions out of order in order to assess multiple overdraft fees against the consumer.

Consumers have complained that their transactions were indexed by financial institutions using the amount rather than date, further depleting their accounts of much needed funds and leading to multiple overdraft fees. The Pew report also found that many banks had failed to meet their recommendations regarding checking account overdraft protection programs, stating that 40 percent of banks had processed transactions out of order.

The Pew also found that almost 80 percent of banks allow customers to overdraw their accounts on ATM and debit card point of sale (POS) transactions. The Pew is currently recommending that regulators make their overdraft policies as clear as possible, to help consumers from incurring unnecessary multiple overdraft fees.

Another recommendation in the report is for financial institutions to make small dollar loan options available to consumers. These loans could be more affordable than overdraft fees. Another helpful protocol would be to decline debit card transactions that overdraw the consumer’s accounts, or to establish a maximum number of overdraft fees that can be charged in a twelve month period and limit the number of any additional fees that could incur.

Overall, the Pew report recommends that banks and credit unions be more transparent with their overdraft protection policies and implement steps that may help prevent multiple overdraft fees from incurring.