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The Myth of Overdraft 'Protection'

In the old days, if you wrote a check that your bank account couldn’t cover, that check would bounce.

But now banks say they can help you by providing overdraft protection – a service where they essentially float you the cash if you make a transaction you can’t pay for whether it’s a check or purchase with your debit card. Of course, the service comes with strings – a fee per transaction that can be as high as $40.

Banks typically extended overdraft protection automatically to their customers as a complimentary service, but the fact is the so-called “service” brings in an estimated $17 billion a year for the banks, according to the Center for Responsible Lending.

Joe Ridout, consumer services manager for watchdog group Consumer Action, says it’s “simply outrageous.”

To make matters even more egregious, according to Ridout, some banks will deliberately delay the order in which they process customers’ debits so to maximize the overdraft fees they can charge.

The Federal Reserve is considering significant reforms to curb abusive credit card practices and the overdraft protection issue could be included. Ridout believes banks should be forced to change the model from opt-out to opt-in. After all, he says, a recent poll found that a staggering 98 percent of people said they would not continue an ATM transaction is they were told it would overdraw their account and they would be charged a fee.

It’s clear consumers want to be able to choose to sign up for overdraft protection instead of being automatically enrolled. The question is, will the banks listen?