Overdrafts Pile Up as Opt-In Pays Off, But Were Consumers Misled?

by Mercator Advisory Group 0

Last summer, when the August deadline for opting-in for automatic debit card overdraft protection was required, banks were aggressively reaching out to their customers to encourage them to opt-in for the coverage. Many banks also were encouraging customers to sign up for mobile banking and use account alerts as a way to know their balances at all times to avoid fees.

Success rates for these promotions are debatable. The Center for Responsible Lending says 33% of account holders opted-in to overdraft coverage. The ABA says 46% of consumers opted in. Moebs put the number between 60% and 80%, with a median of about 75%.

Whatever the case, it’s clear that some significant segment of the population feels they need overdraft protection. And it seems to be paying off. Moebs predicts overdrafts will hit $38 billion this year, an all-time high for the industry.

A study by the Center for Responsible Lending contends that banks mislead consumers and used scare tactics to retain the lucrative overdraft revenue. Another study from Pew Charitable Trusts concluded that overdraft fees were disproportionate to the amount of the overdraft. According to Moebs:

44.3% of banks and credit unions made some type of change to their overdraft program in response to opt-in requirements. 55.7% did nothing. One in five increased prices to offset revenues lost from those opting out. 6.5% actually decreased prices for overdraft protection. Moebs said its data shows institutions that decreased overdraft fees either maintained or increased their overall revenue in the past year.

BofA eliminated overdraft fees on debit cards last summer because customers said they would rather have debit card purchases declined than pay a fee.

Moebs study revealed that almost all of those who averaged 10 or more overdrafts in a year opted in. JP Morgan Chase said that of those who frequently overdraw their accounts 53% have chosen to sign up for the overdraft coverage.

Overdraft Fees (in Billions)

overdraft fees

Graphic from The Financial Brand

For more information read the article in The Financial Brand: http://thefinancialbrand.com/18262/opt-in-marketing-increases-overdraft-feerevenue/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+thefinancialbrand+%28The+Financial+Brand%29

For more opinion from the Center for Responsible lending: http://www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/banks-misleading-marketing.html

Click here for related Mercator content: “Retail DDA Fee Structures: An Examination of Top Debit Issuers’ Retail Checking Account Models”

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