The way economic research firm Moebs Services sees it, there are a few major reasons consumers have been slammed by overdraft fees in recent years: -Record levels of debit card use
-Sluggish economic conditions
-The “Float” phenomenon (how much faster banks clear checks these days)
A decade ago, debit cards were used for only 9 billion transactions and it could take checks as many as 10 days to clear the bank. That figure has more than quintupled since – nearly 48 billion debit cards are swiped each year – and checks sail through bank systems overnight.
“This dramatic shift in payment and transaction processing has acted like a silent sleuth on consumers,” says Michael Moebs, economist and CEO of Moebs Services. “With these variables playing out against the backdrop of a sluggish economic recovery, consumers found themselves caught in a perfect storm.”
Still, there should be a fourth on Moebs’ list of causes: Transaction mis-ordering.
Banks have been known to order withdrawals in non-chronological order – “a practice that can greatly impact the number of overdraft fees charged to a customer,” according to the Pew Research Institute, which urged an end to the practice.
See their interactive infographic below for a taste of what all the fuss is about. The consumer in question would have been charged just $22 on her overdraft if her purchases had been listed in the order they were made. But Wells Fargo switched things around (click the second tab to see), listed them by dollar value, and subsequently charged her three times that amount.
This is just one of the shady practices that’s had the CFPB gunning for banks for in recent weeks.
“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees,” CFPB director Richard Cordray said at a roundtable discussion in New York last month.
Either way, it seems consumers are wising up to overdraft fees even without government intervention.
According to Moebs, the number of overdrafts per household dropped by 18 per cent last year, dragging down banks’ overdraft profit from $33.1 billion in 2010 to $29.5 billion in 2011.
Two-thirds overdraft consumers (about 40-45 million Americans) who overdraw their checking account do so unintentionally, Moebs says, but the solution isn’t in decreasing or even policing overdraft fees – it’s about preventing them altogether.
“More information and greater clarity of message is what is needed,” he says. “Notice needs to be made via text messaging and email messages within hours of the checking account going negative, and communication needs to be provided in non-legalise, common sense, junior high language.”