Checking accounts—and the debit cards that come with them—should be a simple and straightforward way to handle routine financial transactions. And yet, many people simply don't understand the overdraft policies at their bank or credit union.
A majority of the bank customers (52 percent) who paid a debit card overdraft penalty fee in the last year, did not recall signing up for this service and were not aware that a fee was involved, according to a recent survey by the Pew Charitable Trusts.
Why all the confusion? Is it something the banks are doing?
Four nonprofit organizations teamed up to find out. The California Reinvestment Coalition of Oakland, New Economy Project of N.Y., Reinvestment Partners of Durham, N.C. and Woodstock Institute of Chicago, sent secret shoppers into dozens of bank branches in their cities.
Those mystery shoppers, who made a total of 64 visits, received information that was often "unclear and incorrect," according to a recently released report.
"There wasn't a single bank in which every one of our secret shoppers came back with the same understanding of how their overdraft protection policies worked," said Courtney Eccles, policy director at the Woodstock Institute.
"No one understands overdraft, not even the bankers," said Andrea Luquetta with the California Reinvestment Coalition. "Many of our testers got lengthy explanations that were confusing and sometimes conflicted with the written materials they received."
Keep in mind: These testers were trained about what to say and what to look for in the responses from bank employees.
"They were significantly more informed than the average consumer looking to open a checking account," said Liz Fusco, staff attorney with the New Economy Project. "If they were confused, I really don't know who wouldn't be."
A complicated service
To understand the problem, you need to understand the rules for overdraft. At most banks and credit unions, checking account customers are automatically enrolled in overdraft protection for paper checks. Bounce a check and you pay a fee.
If you want overdraft protection for debit card transactions and ATM withdrawals, you have to specifically sign up for it. You cannot be automatically enrolled. Financial institutions are required to get your written permission.
Choose to accept overdraft protection and a debit card purchase or cash withdrawal at an ATM will be approved—even if you don't have enough money in your account, but you'll pay a fee for this short-term loan. Right now the median overdraft fee is $34, according to a new report from the Consumer Financial Protection Bureau.