Overdraft protection is common practice in the banking world, with banks and credit unions offering various policies for different types of customers. However, overdraft protection has become a contentious issue for the general public, with many alleging financial institutions abusing their overdraft policies to maximize overdraft fees.

Overdraft protection acts as a preventive measure for consumers, covering their transactions when their account becomes low or insufficient. When the customer’s primary checking account becomes insufficient due to a transaction, the bank or credit union then transfers money from a secondary account to cover the purchase. This money can also come from a small loan or money market, which is meant to prevent the embarrassment of card decline at the checkout counter.

While overdraft protection varies between financial institutions, customers are generally given a grace period to make their account sufficient again and to pay the overdraft fee.

These fees can range in size, but the average overdraft fee seems to range between $10 to $35 per occurrence.  These fees can quickly accumulate if not quickly paid off. Depending on the overdraft protection policy, multiple overdrafts could occur in a single day or could accumulate with interest if not paid off within a certain time period.

The ambiguity of overdraft protection policy language has been called out several times in unfair overdraft fee lawsuits, some of which which were filed against big banks like HSBC and Capital One. The consumers complained that the language of the overdraft policies were too complex and were specifically worded in a way to confuse or mislead customers.

However, this is not the only overdraft protection behavior that is troubling consumers, with many alleging that their financial institutions had taken unfair measures to maximize overdraft fees.

Overview of Overdraft Protection Problems

Overdraft protection was originally created as a way of preventing consumers from falling into financial distress, by preventing card decline and warning consumers when their accounts become low.

However, it has since become a way for banks and credit unions to collect money from consumers, with a recent report from Pew Charitable Trusts stating financial institutions have doubled their revenue in overdraft fees between 1984 and 2015.

Financial institutions allegedly increased overdraft fees and changed their policies after being pinched by the economic recession and low interest rates. The Pew Charitable Trust report also found that 87% of consumers were vulnerable to overdraft fees and had concerns about their overdraft protection policy.

This behavior spurred federal regulators to take action, with lawmakers making it illegal for financial institutions to sign customers up for certain kinds of overdraft protection without their consent on Aug. 15, 2010.  Federal law now requires banks to ask customers to opt in to overdraft protection for ATM and debit card transactions. The Consumer Financial Protection Bureau is currently examining its overdraft protection policy, and may implement additional laws.

New policies will not help consumers who are currently experiencing the mental strain from expensive overdraft fees. In the past several years, certain banks have faced class action lawsuits for unfair overdraft practices. These lawsuits alleged the banks and credit unions had allegedly failed to disclose fee structures, and indexed transactions by amount rather than date/time in order to diminish the customer’s checking account. In addition, these banks and credit unions allegedly allowed customers to overage their accounts to incur multiple overdraft fees.

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