Overdraft fees are like a movie monster that just won't die. No amount of public outrage or regulation can slay the beast.

But the banks aren't the only ones casting overdrafts in financial sequels: Truth is, consumers who don't properly manage their accounts, or who have money problems, keep breathing life into the overdraft dragon.

"Overdrafts are part of the small advance and loan market," explains G. Michael Moebs, CEO of Moebs Services. Other parts of that "market" include credit card cash advances, transfers from deposit accounts or small lines of credit, payday loans, pawn loans, even gifts and loans from family and friends -- and at the extreme, loan sharks. "The surprise is, no matter how much government tries to regulate and legislate away this small loan market, it keeps coming back," says Moebs. "People want and need a funding safety net."

According to Moebs Services, a consulting firm for the banking industry, overdraft revenue in the second quarter of 2011 was up b $700 million (from $30.1 billion in the first quarter to $30.8 billion) at both banks and credit unions. The average number of overdrafts per household remained fairly even.

In the majority of cases, overdrafts are accidents, something that happens when people don't keep track of their transactions. However, a surprisingly large fraction -- 26%, according to Moebs -- are intentional. The Moebs study found that 34 million Americans use overdrafts to fill a shortfall of funds, while 19 million of them go to payday lenders. "People have short term needs: medical, auto repairs, relative in trouble, or they are just short cash in some pay periods," says Moebs.

With median overdraft fees at $28, the cost of those accidents and choices adds up. Worse still, Moebs estimates that typically, 90% of overdraft fees are paid by the poorest 10% of customers.

The Pros and Cons of Overdrafts

Linda Sherry, director of National Priorities for Consumer Action, points out that there's more than one type of overdraft, and says the good and bad varieties of overdraft protection shouldn't be lumped together.

"While overdrafts can serve as a short-term loan, we have some important caveats," she says. "We are not talking about 'automatic' overdraft or bounce protection. We are talking about the kind of overdraft protection that you apply for and it covers your overdrafts and charges you only a reasonable transaction fee and any interest on the loan. This one spares you overdraft fees altogether. Most reputable banks offer this."

"Banks also offer the kind of overdraft protection that we don't believe in -- when people overdraft they pay the overdraft but still charge a hefty overdraft fee of $30 or so. We urge caution in allowing a bank to do this," says Sherry.

Moebs argues though, that increased regulation of overdrafts does more harm than good. "Those Americans that rely on overdrafts and advance payday loans, do not have the FICO score to qualify for a line of credit or credit card," said Moebs, in a prepared statement. "By creating unintended consequences, such as predatory lending from loan sharks, adding limits to overdraft volume or price will do more harm than good."

"Regulators should get out of and stay out of the short term money needs of consumers -- they cause more problems than solutions. Instead of trying to tell consumers what they need and how to manage their money, let the market do it," says Moebs, whose clients include banking and savings institutions.

"The huge mistake that many make when looking at overdrafts, payday loans and pawn loans, is trying to measure it by large loan standards -- namely APR. It's like bringing a baseball speed gun used to measure the velocity of a pitch to measure the speed of a college or NFL football player. Overdrafts are measured by fee amounts, not rates."

Consumers Still Need Protection

Regulators clearly disagree with that: Overdraft fees remain high on their agenda. In 2009, the Federal Reserve stepped in with new rules to make overdrafts and fees more transparent. Since then, some banks have gone even further and eliminated the overdraft option on ATM and debit transactions. Other banking regulators have either proposed or issued supervisory guidance governing the banks that they oversee.

The newly formed Consumer Financial Protection Bureau, too, is taking on overdrafts. "The Bureau will carefully assess how we can best ensure that the overall market for short-term credit is fair, transparent, and competitive," said Raj Date, special advisor to the Secretary of the Treasury for the CFPB, in a recent speech at the Lessons Learned from the Financial Crisis: The Need for the CFPB event in Philadelphia. "We will be monitoring the impact of the recent regulatory and supervisory interventions. If we find that these interventions are not working as intended, we will adjust. And if we find that additional action is needed, we will act."

What's the best advice for consumers? Says Moebs, "Have your checking account at a community bank or credit union, because the price is less and you will get the short-[term] funding you need and want."

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September 28 2011 at 2:24 AM Report abuse +1 rate up rate down Reply

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September 26 2011 at 9:54 PM Report abuse rate up rate down Reply
Jeff B

Never mind most of these people will run out an buy the Iphone 5, yet constantly overdraft their account.

September 26 2011 at 3:36 PM Report abuse rate up rate down Reply
Jeff B

I guess I am just going to start spending more than I make and have everyone else pay for it. You CHOOSE to overdraft. You CHOOSE which bills to pay first and what to blow at Wal-Mart. Did you REALLY need that soda or ice cream? Maybe you should stop watching so much TV and have a lower electric bill? Just sayin....

September 26 2011 at 3:34 PM Report abuse rate up rate down Reply

We may certainly need finance reform to prevent another mortgage crisis. But increasingly, finance reform is being warped into a substitute for any personal accountability of our own finances. Overdrafts are so easily avoided with a balanced check book, but instead of that, activists and politicians would rather we direct our efforts at capping the payday loans people use to avoid overdrafts.

September 26 2011 at 1:18 PM Report abuse rate up rate down Reply

As a banker it has become apparent that few people keep a check register anymore but rely on Online Banking, an ATM machine balance or simply a balance given to them at the Bank. People--it is still necessary to track, however you may, what your balance is with any outstanding items! Rarely is there any "float: time. If you don't have it,,,don't try to spend it or you will get charged!

September 26 2011 at 11:58 AM Report abuse rate up rate down Reply

Americans are spoiled. They have been raised to think they some God given right to own the latest fad in electronics, clothing, or automobiles. We have not been taught self-discipline and the value of living below your means. Saving for the future is an unheard of concept. And to make matters worse, this has been reflected in our government spending as well. There will come a time when all who behave like this will have to pay the band. Then the hypocrites will blame evryone and everthing but themselves. They will not be willing to face the truth that looks at them in the mirror.

September 26 2011 at 11:34 AM Report abuse +2 rate up rate down Reply

Good grief. Don't spend what you don't have. If people are that GD stupid, they deserve to get burnt; even then, they can't figure it out. If the Governent "solved" the overdraft problem for these greedy little twits, then they'd soon find another way to live on the edge.

September 26 2011 at 11:28 AM Report abuse rate up rate down Reply

RE: Did it occur to the author of this article, that most overdrafts occur when people are cash strapped. Are you a moron, or do you just play one when writing for CNN. Read some of the other financial articles written here everyday, and you may come to the conclusion that the US economic picture is not all that rosey.
Answer: I find that hard to believe when restaurants & malls are packed, everyone is looking at their smartphone and retailers are posting record revenues & profits.

September 26 2011 at 10:46 AM Report abuse -1 rate up rate down Reply

Its due to a lack of personal responsibility and when one puts designer clothes, $150 Nikes, their $140 a month Smart phone bill & $800 a month credit card payment (only minimums) they may find themselves cash strapped. Who would have thought. The majority of people who find themselves in this situation have only themselves to blame for living above their means and having this shallow, materialistic, self absorbed shallow attitude

September 26 2011 at 10:31 AM Report abuse -1 rate up rate down Reply