Banks reap billions of dollars in revenue each year from abusive overdraft products. The exorbitant fees, often $35 for even a very small overdraft, and short repayment terms make the actual cost of credit astronomical, and because overdraft loans are not regulated as credit, they lack many consumer protections. Overdraft, sometimes referred to as “courtesy overdraft,” can be a debt trap that causes great financial hardship for lower income customers, and pushes many out of the banking system.
Banks derive the vast majority of overdraft revenue from a relatively small percentage of struggling customers who repeatedly overdraft, and who are disproportionately lower income or people of color.
Overdraft products are the biggest fee generator for banks. As reported in the Wall Street Journal, a survey by Moebs Services, Inc. found that financial institutions generated $31.9 billion in overdraft revenue in 2013, while the median fee per overdraft has gone up since 2009.
In response to broad concerns about the abusive nature of overdraft products, the Federal Reserve Board enacted certain regulatory changes in 2009, including requiring that bank customers must “opt in” to bank overdraft products that may be triggered by ATM withdrawals or debit card purchases. Despite the Federal Reserve’s 2009 rule changes, many bank customers are reportedly opting in to expensive courtesy overdraft coverage without their knowledge or understanding.
California Reinvestment Coalition, New Economy Project, Reinvestment Partners, and Woodstock Institute – undertook this mystery shopping project to investigate how the largest banks in four cities provide information to customers about the cost and risk of overdraft coverage.
Key Findings – New York
New Economy Project’s mystery shoppers visited the four largest retail banks in New York City, measured by deposits: Bank of America, Capital One, Chase, and Citibank. Eight mystery shoppers made 16 visits to bank branches, dividing their visits between branches in predominantly white and non-white neighborhoods.
1. Most bank employees presented overdraft as an automatic account feature, rather than as an optional product that, by law, the customer must opt into. Using words such as “feature” and “benefit,” and describing the overdraft fee as the “cost of overdrawing the account,” these bank representatives initially depicted overdraft as part of the basic account terms, or as an automatic feature when responding to questions from mystery shoppers.
2. Bank branches in communities predominantly of color were generally understaffed compared to branches in predominantly white neighborhoods, leading to long wait times and shorter consultation with bank staff, and making it more difficult to get basic account information. None of the mystery shoppers who visited branches in predominantly white neighborhoods encountered inadequate staffing, long lines, or poor service.
Given the abusive nature of overdraft, and based on findings from our mystery shopping, our four groups urge the CFPB and federal banking regulators to exercise their jurisdiction to prohibit overdraft fees on all ATM withdrawals and debit card transactions. Instead, banks should simply decline transactions if there are insufficient funds in the account.