Bank Overdraft Fees For Debit Cards See New Reforms
June 14th, 2011 | 
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New Federal Reserve rules take effect July 1st to give consumers more protection against bank overdraft fees on debit cards. Up until now, many banks automatically offered overdraft “protection” for debit cardholders. That meant that if a debit cardholder had insufficient funds in his or her account to cover a purchase or ATM withdrawal, the bank would allow the transaction to go through, but then could charge an overdraft fee. A study of 462 banks by the Federal Deposit Insurance Corp. showed that overdraft fees range from $10 to $38, with a median average of $27.
Overdraft fees on debit cards generated more than $20 billion for banks in 2009, according to the New York Times. Banks earned another $12 billion overdrafts caused by check writing, which this law does not address.
A study by the Greenlining Institute, a think tank focused on multiethnic public policy, indicates that bank overdraft fees hit low-income consumers and people of color the hardest. That’s because people new to banking and/or with low incomes tend to maintain low bank balances. These are the very bank customers who can least afford to bear the burden of extra fees.
Under the new law, consumers must opt-in for overdraft protection on debit cards. Without it, a debit card transaction would simply be declined at the point of sale if there were not enough funds in the account to cover a purchase. For transactions that did go through and the bank would have to cover the overdraft without charging a fee. To protect their lucrative revenue stream, banks are beginning to send out alarming marketing messages urging debit card holders to opt into an overdraft service or risk not having to make payments “even in an emergency” that result in overdrawn accounts.
Overdraft Charges: Banks Game the System
The Greenlining Institute report also points out that many banks have gamed the system to maximize the fees they can collect by “reordering” purchases in a given day to count the most expensive one first. This way, they raise the chance that each additional purchase can count as an overdraft if the highest purchase of the day wipes out your account balance. For example, let’s say you have $100 in your account. You use your card to buy lunch for $10, you fill up your card for $30, you buy clothes for $50, and then you pay a bill for $60. If the bank processed these transactions in the order that they were made, only the last charge would be counted as an overdraft. But by processing the $60 and $50 transactions first, the bank then counts the $10 and $30 transactions as overdrafts and charges you two overdraft fees instead of one.
The Institute concluded that despite changes in the law, overdraft fees are still too high and continue to affect low income consumers disproportionately. With widely varying policies among banks, and hard to follow fee structures, consumer continue to be at risk for being hit with unexpected and costly charges.
Few Prepaid Debit Cards Allow Overdrafts
Because prepaid cards are not tied to a checking account, prepaid card issuers are not inclined to allow overdrafts or collect overdraft fees. This is because cardholders could potentially make a purchases with insufficient funds on a card and then fail to load money onto the card to cover the overdraft. Thus, when an attempted purchase is greater than the amount of funds available on the card, the transaction will simply be declined. This is largely seen as a benefit by prepaid cardholders. Prepaid cards are a positive alternative for consumers who have been denied checking and have trouble obtaining a credit card or other kind of debit card.
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