overdraft

Why Overdraft Fees Exist, and How We’re Fighting Them

Introduction

You’ve had a great month. You went to your friend’s wedding. You remembered your mom’s birthday and bought her flowers. You paid your rent. And after all that, you put away $100 in your savings account. You notice that your checking account is a little low — ok, really low. There’s $7 left. But you get paid in two days, so no problem. Phew.

Unbeknownst to you, Netflix automatically bills you $7.99 the next day.

Your bank signed you up for “overdraft protection.” That means your bank will float you the money to pay your Netflix bill – or any bill. But they charge you a $35 fee each time.

So you just paid a $35 fee for a $0.99 shortfall in your checking account.

This is the story for millions of Americans every year who pay more than $23 billion in overdraft fees, $35 at a time.

History

Overdraft fees made sense a long time ago. Let’s say you had to write a check for $600 in rent, but you didn’t have the money. Your friendly local banker would front you the $600 by not “bouncing” the check. In exchange, your banker would charge you a relatively small fee for the service.

Effectively, this is a payday loan from your bank. Banks knew they could provide an ultra-short-term credit option at relatively low risk because you kept all your money with them.

What’s changed? More payments are made electronically, through debit cards and automatic subscription billing. With more money flying around in increments of wildly variable size, it’s harder for folks to keep track of how much is left in their account. And this leads to more overdraft fees.

Why Now?

Overdraft fees are starting to attract attention from regulators like the CFPB, which has an ongoing investigation. Especially after the Wells Fargo scam — in which bank employees created millions of unauthorized, fee-charging accounts that their customers didn’t know about — consumers and regulators are increasingly aware that big retail banks might not be acting in the best interest of their customers.

We hope that the public, regulators like the CFPB, and Congress will take a good, hard look at overdraft fees and decide whether they’re fair or not. Regulators could demand that banks reform their marketing of overdraft programs, reduce the fee amount, and give a “grace period” for consumers who incur a fee.

What Trim Is Doing

Trim is an AI-powered financial assistant. We find ways to save you money and then actually do them for you – like cancelling your old subscriptions. Recently we’ve started contesting overdraft fees on behalf of our users.

If you’re a Trim user, and you get hit with an overdraft fee, we send you a text with an alert. You can reply to that text with the word “refund,” and we’ll send a template email automatically to your bank. This results in a refund of the fee about 1/3 of the time.

To date, we’ve sent 560 overdraft appeal emails, and seen refunds on 174 (31%). But this clearly isn’t enough. We need to get everyone involved in order to bring an end to unfair overdraft fees.

Takeaways

  • Banks make $23 billion from scammy overdraft fees per year. That’s more than the cost of subprime auto loans and nearly three times as much as payday loans.[1]
  • The typical overdraft fee is $35. According to Trim data, nearly one-third of fees are incurred by transactions that are less than the amount of the fee itself.
  • Trim is helping consumers to fight overdraft fees by automatically sending an appeal to your bank when you get hit with a fee. We’ve had a 30% success rate so far.

[1] http://www.cfsinnovation.com/CMSPages/GetFile.aspx?guid=ac5235a9-a42a-434c-a26a-66a1b148b712

 

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