WASHINGTON — Overdraft protection often is a better deal for banks than for consumers, a new study by a federal watchdog agency reveals.
The report, being released today by the Consumer Financial Protection Bureau, found that consumers who sign up for banks’ optional overdraft coverage on debit card transactions and ATM withdrawals pay higher fees and are more likely to end up with involuntary account closures than those who decline.
Banks profit from consumers’ misfortune.
Fees for overdraft and nonsufficient funds accounted for more than 60 percent of banks’ total revenue from consumers’ checking accounts in 2011, according to the report.
“Many financial institutions market their overdraft services as a protective measure that offers consumers greater peace of mind and security,” Richard Cordray, the bureau’s director, said Monday in a call with reporters.
“They correctly note that consumers often benefit when overdraft transactions are paid, which helps avoid returned checks or declined transactions. But our study also raises questions. What is marketed as overdraft protection can in some instances put consumers at greater risk of harm.”
Cordray said the bureau plans to research overdraft programs further before taking any policy action.
Overdrafts occur when customers try to withdraw or spend more money than they have in their accounts. Banks can block the transaction and charge an “insufficient funds fee,” or allow the money to go through and charge an overdraft fee.