Customers expect their bank to safeguard their money, not use it to increase their own bottom line wrongfully. Yet many U.S. banks rely on overdraft fees to increase profits and revenue. According to Moebs Services, a financial industry market research company, banks generated an estimated $34.5 billion from overdraft fees in 2018 alone.
Years ago, when most people paid their bills by putting a check in the mail, bank regulators created a general exemption known as an “overdraft,” which allowed banks to cover the customer who inadvertently put a check in the mail too early. However, with the inception of debit cards, these overdraft fees have evolved from a customer convenience into a reliable, bread and butter source of revenue for many retail banks.
However, this dependable revenue source has prompted expensive class-action lawsuits for many banks. Indiana-based German American Bancorp Inc. recently agreed to pay over $3 million to settle a class-action lawsuit claiming the bank wrongly charged customers overdraft (OD) fees, even if their accounts had sufficient funds to pay for transactions when purchases were made. One plaintiff in the case alleged that she was issued an overdraft fee for an $18 transaction – even though she had over $19,000 in her Bancorp checking account – and was improperly charged more than $400 in overdraft fees between 2017 and 2019.
The case is one of many filed in U.S. courts that challenge banks’ use of these “authorize-positive, settle-negative” (APPSN) transactions. For example, in December 2021, NBT Bank agreed to a $5.7 million settlement (including a cash payment of $4.25 million to current and former customers and a waiver of $1.5 million in uncollected overdraft fees) in a federal lawsuit related to improperly charged APPSN transactions. According to the complaint, when a debit card transaction was authorized on an account with sufficient funds, NBT bank would immediately set aside funds to cover the transaction (which subsequently reduced the customer’s checking account balance), adjust the customer’s “available balance” to reflect the reduced amount, and then issue an OD fee on the transaction.
In 2013, plaintiffs in a series of cases consolidated into multidistrict litigation in New York made allegations that HSBC bank used a computer program designed to manipulate customers’ transaction records to maximize overdraft fees to maximize revenue from overdraft fees. According to the plaintiffs, HSBC bank would routinely post debits to customer accounts in non-chronological order (largest to smallest), causing customers to incur fees that would not have been imposed had the transactions been posted chronologically (smallest to largest) order. HSBC was also charged with failing to clearly disclose the posting order to customers, not posting deposited funds to customer accounts in a timely manner (which resulted in additional overdraft fees), and neglecting to advise customers of their right to opt out of HSBC’s overdraft program. Before July 1, 2010, HSBC automatically enrolled customers in this program without allowing them to opt out.
In addition to becoming the subject of class-action litigation, overdraft fees are also being highly scrutinized by federal regulators. For example, the Consumer Financial Protection Bureau (CPFB) recently published two separate reports, one documenting banking institutions’ increased reliance on overdraft fees, and another detailing the impact these fees have on customers. According to the reports, nearly 92.9% of banks have an overdraft program, financial institutions have generally become too reliant on these fees to increase revenue, and the fees are harmful to customers.
Financial institutions have responded to greater scrutiny of overdraft fees in numerous ways. Some, such as Wells Fargo, Bank of America and Capital One, revised their overdraft practices by providing grace periods to cure an overdraft before a fee is triggered, reducing the overdraft fees they charge or eliminating them entirely. However, other banks and some credit unions are instead relying on arbitration agreements to reduce the threat of litigation.
According to CFPB Director Rohit Chopra, overdraft fees, which he calls “exploitative junk fees,” represent a “clear market failure” on the part of banks, and need to be reined in. “Consumers are handing over billions of dollars of their hard-earned money in these fees, even during a pandemic, he said. “By promoting a well-functioning market, American families can save billions and law-abiding banks can thrive.”