Overdraft protection service is offered by banks and credit unions throughout the country and is supposed to protect consumers from the public embarrassment that is card decline.

However, a number of consumers and financial experts are complaining that these financial institutions are using overdraft protection service to charge unfair overdraft fees to consumers. According to a recent research survey by the Pew Charitable Trusts, most overdraft protection service programs aren’t helpful for consumers because of two significant factors.

First of all, consumers can take measures to avoid these insufficient fund fees even if they overdraw their accounts. The second part is that consumers use their overdraft protection service program for credit, even though regulators state this should not be the case.

According to the Federal Deposit Insurance Corporation guidance, only 29% of concerns reported that their banks had discussed alternative options to overdraft protection service. The banks should have “meaningful and effective follow up” with customers who incur overdraft fees six times or more in a year.

The research report also noted that consumers can avoid these fees by discussing their overdraft protection plan with their bank, and that financial institutions should be better about communication and disclosures. This is especially true in regards to consumers who use the overdraft system as a form of credit, which will cause them serious financial strain in the long run.

Overall if banks and credit unions increased the efficiency of their communications with customers and provided proper financial advice to financially vulnerable customers, these overdraft fees could be avoided.

Overview of Overdraft Protection Service

Overdraft fees occur when the consumer’s primary checking account becomes overdrawn, with the bank or credit union transferring money from a secondary account or line of credit to cover the purchase.

Overdraft protection service was originally developed to help financially strapped consumers and provide flexibility for small purchases. However, this has allegedly not been the case for years, with numerous consumers alleging financial institutions were their abusing overdraft protection service policies to collect fees.

Consumers who overdraw their accounts are often in an economically vulnerable position and are often living paycheck to paycheck. This means that once the overdraft fee occurs, the consumer will have all to of trouble paying them back.

If consumers cannot replenish their accounts and pay back the overdraft fee in a timely manner, they could be charged interest or other charges imposed by the bank. According to the survey, banks make billions from overdraft fees and over three qualities of this money come from checking accounts.

The Pew Research survey had consolidated data from 2014, which indicated that 68% of consumers who overdraw their accounts would prefer that their cards were declined rather than deal with an overdraft fee. This may be because consumers are unintentionally overdrawing their accounts, but their banks or credit unions may still authorize the charges.

In addition, 27% of these consumers stated they did not feel that their bank sufficiently explained their overdraft protection service and that they did not understand how they could avoid insufficient fund fees. Under federal law, banks and credit unions must provide an opt-in option for customers before signing them up for any overdraft protection service.

Even with this federal requirement, customers are still finding themselves vulnerable to unwanted overdraft fees.

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