Understanding Overdraft
Protection
With more financial institutions offering overdraft or “bounce”
protection to their customers from hot checks, there have been some
questions from consumer groups about these programs.
Overdraft protection
is usually offered to all customers when they open an account. It is
a privilege that can be suspended if abused. Bankers view this service
as a convenience to customers. While the bank will charge a fee for
this service, the customer pays significantly less under a bounce protection
program than they would if the item were returned for nonsufficient
funds (NSF).
Without bounce protection,
the check drawn against nonsufficient funds would be returned, the bank
would impose a fee, and the merchant would impose a $25 fee. The customer
would then have to pick up the check, buy a money order and go back
to the merchant to pay for the item. If the customer doesn’t follow
through, the county attorney could prosecute a “hot check”
criminal case.
State and federal
laws regulate deposit account agreements and disclosures. Federal law
requires disclosure of fees and charges on consumer accounts. The Truth
in Savings Act permits a bank to market an account as “free”
if the bank does not impose service or maintenance charges. However,
NSF fees, stop payment and check printing fees are all within the customer’s
control and these programs and fees don’t keep the account from
being “free.” Keep in mind that ALL fees must be disclosed
before an account is opened. Additionally, the bank cannot change these
fees without giving a 30-day advance notice.
There is no stereotypical
customer who uses bounce protection. It benefits high net worth customers
who accidentally overdraw their accounts as well as the college student
who might have forgotten to write down the check for textbooks in his
or her check register. Bounce or overdraft protection assures that the
mortgage or auto payment won’t get returned, triggering collection
and foreclosure repossession activities.
While bounce protection might provide important savings to wise consumers,
a careless customer can indeed run up his or her costs. Here are some
tips for the savvy customer:
- Read disclosure
of fees and the explanation of the bounce protection plan. Does the
bank pay large items (like your mortgage) first, or does it pay the
smallest item first or does it pay in numerical order of outstanding
checks?
- Reduce your need
for protection by carefully logging all checks, debit card purchases
and ATM withdrawals in your check register. Reconcile your bank statement
as soon as it comes in.
- If you need to
make a payment, but you don’t have the money, weigh the pros
and cons of getting a credit card advance versus using your bounce
protection. Do not rely on a post-dated check to protect you.
Keep in mind that
banks are a business. They make money by providing services their customers
want. Certainly they can earn fees on bounce protection programs. However,
consumers have “voted with their pocketbooks” by using these
programs in record numbers. The best advice for consumers is to “shop
around” to find the package that best suits their financial needs.
Provided as a public service by the Community
Bankers of Wisconsin (CBW)
