One feature examined in the study was automated overdraft programs that allowed overdrafts at ATMs and point-of-sale/debit transactions, which 81% of banks used. Most banks informed customers their account was overdrawn after the transaction had been completed: 88% of banks for point-of-sale/debit transactions and 70.7% for ATM transactions. Of the minority of banks that did inform customers that funds were insufficient, 7.9% did so at point-of-sale/debit and 23.5% did so at ATMs.
The FDIC initiated the two-part study in 2006 to gather data on the types, characteristics and use of bank overdraft programs after the rapid growth in the use of automated overdraft programs. The data was gathered through a survey of 496 FDIC-supervised banks. A separate study on customer account and transaction data was also conducted from a sample of 39 banks.
"There is a high number of banks that do not inform customers at the ATM and point-of-sale that they are about to overdraw their account," said James Bowers, managing director of the Center for Economic and Entrepreneurial Literacy. "Somehow in society overdraft fees have been tolerated and accepted, and fees can be completely outrageous."
Mike Moebs, economist and CEO of Moebs Services, said that in his research, he found that credit unions are slightly better at informing consumers before they overdraw accounts, but there is no statistical difference between banks and credit unions when it comes to this issue. His data showed that 75% of credit unions don't inform members through text messages and e-mails and 25% do.
According to Moebs, credit unions could have an edge over banks. The technology systems used by credit unions have better capability to adapt to text message and e-mail alerts than the legacy systems used by banks, he explained. Specifically, Moebs said that software systems from Open Solutions Inc. and Jack Henry & Associates already have the capability built in to alert customers with text messages and e-mails when their funds are low. The banks' legacy systems are set up to handle a higher volume of transactions but also make it harder to implement a program that alerts customers.
"In 2009, credit unions should have a strong policy regarding reporting overdraft alerts electronically to members. Credit unions can adapt very quickly to incorporate this capability and they can be ahead of banks," Moebs said.
Another key point in the FDIC study was that 24.7% of all surveyed banks and 53.7% of large banks batch overdraft transactions from largest to smallest. Ordering transactions this way increases the potential number of overdraft fees an institution can charge.
"There needs to be an increased awareness among consumers. Banks are reordering debit card charges to charge them as many overdraft fees as possible. There's an understanding that these fees are part of having a bank account, and that's not always necessarily the case," Bowers said.
Moebs, on the other hand, said he was surprised that the percentage of banks that process large to small on overdrafts was that low. Out of two dozen studies he's performed with consumers, Moebs said he has never found a consumer that wants overdraft transactions processed smallest to largest.
"Consumers want the transactions that they don't have recourse on processed first. This means they're mortgage payments, card payments and car payments. They want the small purchases that they do have recourse on processed last because they have the opportunity to call or visit the merchant or vendor to plead their case," Moebs said.
Moebs also said that credit unions and community banks are much more prone to refunding fees in a policy that is large to small if a member calls about the charges. For banks, Moebs said that the large banks such as Bank of America and Wells Fargo process large to small but are less likely to refund and small banks are more likely to have small to large process policies in place.
Moebs said he found this information from the FDIC study very beneficial: 74% of service charges pertained to not sufficient funds, which translates into $30.5 billion dollars for banks in 2006 in overdraft charges. Moebs said his research found that number to be slightly higher at $31.5 billion.
In a meeting with several government agencies in Washington to discuss the survey, Moebs said that surprise over the fact that the study was not statistical was commonly reflected in feedback.
"It was one of the chief things I heard throughout Washington. Everyone was looking forward to it because it was so massive, but then they didn't do it statistically."
One part of the study Moebs said he disagrees with is the correlation made between overdrafts and income. In the section of the study that included data from 39 banks with aggregate assets totaling $332 billion and 6.5 million customer accounts, it said that accounts held by customers in low-income areas were more likely than accounts in higher-income areas to incur overdraft charges.
Moebs said he found there is no correlation between income and overdrafts, but there is a correlation between FICO scores and overdraft charges.
"Income and ownership of assets don't correlate, but FICO score does. The lower the score, the more likely they are to overdraw their account."
For this area of the study, the FDIC sent out surveys to 500 banks, but had only 39 banks actually participated.
"This gives an idea of the power of any of the agencies. Unless it's mandated, it's hard for anyone, whether it be the NCUA or the Fed, to get this kind of data," Moebs said.
The major thing that credit unions should take away from this survey, Moebs said, is that credit unions do need to assemble their own set of data in order to go to Congress and present what credit unions are doing in with overdrafts.
"This data can also be misused to go against community banks and credit unions. You need to be prepared to counter," Moebs said.
The FDIC study results can be found at http://www.fdic.gov/bank/analytical/overdraft/.