2016 Was Another Overdraft Fee Bonanza Year For Big Banks

By on March 22, 2017

Banks Bursting With Overdraft Fees

Bank fees rose to an all time high in 2016. These include ATM fees, account maintenance fees and overdraft fees.

Overdraft fees among the 3 biggest banks, JPM Chase, Bank of America and Wells Fargo were $5.4 billion, an increase from 2015. The overdraft fees are paid as part of an opt-in “overdraft protection plan” that most Americans select.  Details vary, but all plans pay a debit or check if the account can is short, charge a fee, and consider the money as a loan with very high interest.

While such plans can be beneficial, banks can manipulate the system to maximize overdrafts through counterintuitive mechanics and poor disclosure.

A common mechanic is to re-order debits against balance in the order from largest to smallest, regardless of chronology. While it may not be obvious, this can result in more overdraft fees. For example: someone has $100 in the bank and uses their card for the following debits in the following chronological order: $5.45, $7, $2.75, $10, $15, $98.  Matched chronologically, there would be 1 overdraft fee because only the last one would be overdrawn. If they are matched high-low, the $98 would exhaust the account, leaving 5 overdrafts.

Each overdraft will trigger an overdraft fee, which varies, but is often $35, larger than the actual debits.  In the above example, the consumer could be facing $175 in overdraft fees.  This practice is counterintuitive, and is not always disclosed properly. Most people reasonably assume that the order of posting matches how they use the card in real life, chronologically.

Another point of common confusion is the difference between “actual balance” and “available balance.” The distinction is confusing: if the funds are “actually” there, why aren’t they available, and if they’re not available why say they are “actually” there?  But in bank-speak there’s a difference, and wouldn’t you know it’s one that results in more fees for them. Typically, the actual balance is the money in an account, and reflects transactions conducted, but not authorized, and pending transactions. The available balance is the amount that can be used without incurring an overdraft fee; it’s the one most people care about. An account holder with an actual balance of $200 and authorizations or holds of $150, has an available balance of $50.  An account holder that authorizes any purchase amount over $50.01 will have a negative available balance. Banks sometimes do not explain the distinction properly.

Regulatory and class actions have returned money to consumes for improper overdraft fees, but the practice persists at some banks. Consumers dancing close to the line should know the mechanics of how their banks implement debits to balances.