The Federal Deposit Insurance Corporation (FDIC) has published a study on the types, characteristics, and use of overdraft programs operated by FDIC supervised banks. This report was produced by the FDIC because of the increase in automatic overdraft protection services provided by many banks and the charges the consumers incur for these programs. The FDIC identifies automated overdraft protection programs as programs in which the bank honors a customer’s overdraft obligations using standardized procedures to determine whether the nonsufficient fund (NSF) transaction qualifies for overdraft coverage.
The share of all banks, covered by the FDCIC report, offering automated overdraft programs was 40.5 percent. Though these bounce protection programs, as they are commonly called, provide some security to the checking account holder, the cost of the service has rise in recent years and can be rather expensive. In addition to the cost of the service, most automated bounce protections programs or overdraft programs have alternatives services that can be less costly to the accountholder. The report found that banks which operated automated overdraft programs had higher NSF related fee income, measured as a share of operating revenues, compared with other banks. The automated programs are the most often used program and the most expensive form off bounce protection.
Of the banks that provided automated overdraft protection, over 75% of the banks automatically enrolled customers in automated overdraft programs. No surprise for fee hungry banks to offer the program that is the most costly form of protection. According to the report, bank customers were usually permitted to affirmatively opt out of the program. An interesting addition to the enrollment process was that the survey comments indicated that in some cases that customers were not given the choice to opt in or out of the automated program.
The 3 most common forms of overdraft protection are automated overdraft protection, linked accounts to cover overdrafts, or lines of credit at the bank to cover overdraft checks. The FDIC report identified the characteristics of each of these services. Automated overdraft programs are usually a computerized program by which the bank honors a customer’s overdraft obligations using standardized procedures or a matrix to determine whether the NSF occurrence qualifies for the overdraft coverage. Linked transfer accounts (linked accounts) are defined as a contractual agreement between a bank and a customer, linking the customer’s transaction account with other accounts within the bank, including savings and credit card accounts. Overdraft lines of credit (LOCs) are contractual agreements between a bank and a customer stating that the bank will lend up to a specified amount over a defined period to cover overdraft items.
Some of the highlights from the FDIC report concluded the following:
Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth of the surveyed banks, 24.6 percent, also assessed additional fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.
Over 85% of banks operated at least one formal overdraft program, either the automated overdraft protection, linked accounts to cover overdrafts, or lines of credit at the bank to cover overdraft checks. Large banks, defined as those with at least $1 billion in assets, offer a larger selection of overdraft programs. Though, the share of all banks offering automated overdraft programs was 40.5 percent, large banks were significantly more likely to operate automated overdraft programs, 76.9 percent, suggesting that a significant share of customer transaction accounts operated under automated overdraft programs.
Almost all banks or 94.7 percent, treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts linked. In addition, customers have to apply and qualify for an overdraft LOC program, so these programs typically operate on an opt-in basis.
The majority, 81.0 percent, of banks operating automated programs allowed overdrafts to take place at automated teller machines (ATMs) and point-of-sale (POS)/debit transactions. However, most banks whose automated overdraft programs covered ATM and POS/debit transactions informed customers of an NSF only after the transaction had been completed.
Banks whose automated program covered ATM and/or POS/debit transactions and banks that batch processed transactions largest-to-smallest reported higher fee income than those that did not have these features. Banks operating automated overdraft programs earned $1.77 billion in NSF fees in 2006, accounting for 90 percent of total NSF-related fee income earned by the entire study population.
Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs, compared with consumer complaints from less than 1.0 percent of banks offering linked-account programs and 1.5 percent of banks offering overdraft LOC programs.
More than half of banks with automated overdraft programs, 54.2 percent, reported that they relied on a third-party vendor to implement or manage the program. Small banks, those with less than $250 million in assets, were more likely to rely on vendors and third parties for automated overdraft program implementation and management. Most banks using vendors to manage their automated overdraft programs, 70.6 percent, also reported that they paid third-party vendors a percentage of the fees generated by the program, typically 10 to 20 percent of additional fees generated.
A significant share of banks, 24.7 percent of all surveyed banks and 53.7 percent of large banks, batched processed overdraft transactions by size, from largest to smallest, which can increase the number of overdrafts.
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