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Beware tricky overdraft pitches

By Claes Bell, CFA · Bankrate.com
Thursday, April 28, 2011
Posted: 2 pm ET

The Center for Responsible Lending, a consumer advocacy group focused on financial issues, has an interesting survey out that might explain why millions of Americans are signing up for "courtesy" overdraft protection on their checking accounts. In case you're not familiar with that term, courtesy overdraft protection allows debit card purchases to go through even if you don't have cash in your account to cover them, in exchange for a nonsufficient funds, or NSF, fee that averages $30.47 a pop.

After the Federal Reserve put in place a requirement that bank customers would have to opt in to courtesy overdraft, a lot of people, including yours truly, thought it would be a tall order for banks to protect what's become a very important profit stream for them. After all, we reasoned, how many people would be willing to pay $30 to their bank to borrow $3 for a couple of days, which is essentially what overdraft services boil down to?

But opt-in they did; all told, 33 percent of bank customers in the CRL survey opted in to courtesy overdraft, which is pretty high considering it's a pretty terrible deal for most people. That's actually much lower than a projection earlier this year from Moebs, which put the number of courtesy overdraft customers at 100 million.

For me, the most interesting part of the CRL study is getting a look at some of the real overdraft pitches they collected. Here are a few:

  • "We need to hear from you ... To keep your account operating smoothly ... To avoid any interruptions in how we service your account, we need to hear from you."
  • "Your debit card may not work the same way anymore even if you just made a deposit."
  • "Please keep in mind that this option (not opting in) may prevent you from completing everyday transactions including any store and gas station purchase, emergency home and car repair ... purchases when traveling, medical or health emergencies."

Honestly, if I wasn't a personal finance reporter, I think I might have a hard time resisting those authoritative-sounding pitches, especially delivered multiple times over multiple channels -- and I wouldn't be alone.

The CRL study found banks' marketing had been overwhelmingly effective at creating sometimes-mistaken conclusions about courtesy overdraft in consumers' minds through clever use of language or just plain 'ol repetition. From the CRL survey summary:

  • Sixty percent of consumers who opted in stated that an important reason they did so was to avoid a fee if their debit card was declined. In fact, a declined debit card costs consumers nothing.
  • Sixty-four percent of consumers who opted in stated that an important reason they did so was to avoid bouncing paper checks. The truth is that the opt-in rules cover only debit card and ATM transactions.
  • For almost half of those who opted in, simply stopping the bank from bombarding them with opt-in messages by mail, phone, email, in person and online banking was a factor in their decision.

The takeaway for consumers here is that banks are going to spend a lot of time and money trying to get you to sign up for courtesy overdraft because it's really, really profitable. So take a hard look at courtesy overdraft, and if you find it's not a good deal for you, which it probably isn't, then stand strong. And screen your calls.

What do you think? Are these pitches manipulative, or just good business? If you've been contacted by your bank about opting in to courtesy overdraft, what was your experience?

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3 Comments
Claes Bell
April 29, 2011 at 10:43 am

You make a good point, Debra. In the end, all these decisions are voluntary. A well-informed, assertive consumer can easily shirk off these pitches, especially if they're dealing with a scrupulous bank who will take no for an answer. Unfortunately, those consumers probably weren't overly hurt by courtesy overdraft in the first place, and were likely fine under the old rules. Serial overdrafters, on the other hand, who were probably the folks the rule was designed to protect, probably don't have the combo of assertiveness and financial savvy needed to resist these offers.

Debra James
April 28, 2011 at 5:03 pm

The approximate half who signed up just to get stop the the solicitations could have achieved the same thing by declining. I bank with Chase, and after CARD Act went live, the solicitations for courtesy overdraft were few; a couple pieces of mail, a couple of emails, and a splash screen when I logged onto the bank's site. After I declined their generous offer, I never received any further contact regarding courtesy overdraft. I usually go into the bank once a week with my mother, and no one has personally asked us to sign up for the service. That's the good thing about having a local branch where the employees know you, and know what you would want.