The Independent Community Bankers of America conducted a study of 3,000 consumers concerning overdraft payment services. Even though the costs are high (averaging $35) for overdraft protection, consumers still want this service. They understand the costs involved and the alternative service available to avoid overdraft charges, such as account transfers and lines of credit. Overdraft fees are preferred over other short term funding, by consumers with four or more overdraft transactions in the past twelve months.
You have to request overdraft protection from your financial institution. If you signed up (opt in) for overdraft protection and you don’t have the funds in your checking account to cover the amount of your check, the financial institution covers the check and charges you a fee, which averages $35.
More than 75 percent of consumers did not incur an overdraft in the past year. This leaves 25 percent that did. The breakdown of those who paid overdraft fees in the last 12 months by institution were as follows: 15 percent were customers of community banks, 24 percent were megabank customers, 19 percent were credit union customers, and 19 percent were regional bank customers.
If they didn’t have overdraft services, they would have incurred more fees such as merchant returned check fees and late fees. In addition, the returned check data would be reported on their credit report and to check verification systems. They could also be contacted by collection agencies to collect the unpaid fees and this would also be reported on their credit report.
In this study, more than 85 percent preferred that their financial institution pay at least one important transaction such as a mortgage or rent payment, provided a fee of an equal amount was charged whether the transaction was paid or returned.
Based upon his study, consumers prefer overdraft services as a more economical way to cover bills they cannot pay. It is cheaper than a short term loan, interest on their credit card or a payday loan. This may be practical in a situation where a large bill is due such as mortgage and the late fee higher than the overdraft fee, which averages $35. This does not apply to someone who writes a check for a $6 item and pays overdraft fee of $35. That purchase now costs $41 instead of $6. If you habitually overdraw your account, you should balance your account with every transaction and you should consider a budget.
The bottom line: There’s a price for embarrassment. Consumers don’t want to have their cards declined at the point of sale or in a restaurant in front of a group of people. They’re more than willing to pay for the overdraft protection. It also begs the question, why did lawmakers feel the need to legislate against overdraft protection when most consumers still want it? Seems like they didn’t do their research before passing a law outlawing something that wasn’t troublesome to most of us.