The consumer advocates at the Center for Responsible Lending don’t mince words: “overdraft ‘protection’ is a racket; not a service.” CRL explains:
Transaction shuffling and multiple, exorbitant fees for small shortfalls in their checking accounts cost Americans billions per year in unfair fees. More than half of Americans are now living paycheck-to-paycheck, making a majority of U.S. families vulnerable to bank overdraft practices that are exceedingly misnamed “overdraft protection.”
In effect, overdraft “protection” products can become like payday loans, with high fees substituting for high interest, and consumers at risk of getting caught in a cycle of debt they cannot emerge from. But as toxic as overdraft products can be for consumers, they are highly lucrative for banks. In fact, according to a recent Wall Street Journal investigation, some banks make a disproportionate amount of their income relative to overall deposits from overdraft and other fees. Many of these high fee stores turn out to be banks with a heavy presence inside Wal-Mart stores. According to the Wall Street Journal, the five banks with the most Wal-Mart branches were among the top 10 U.S. banks ranked by fee income as a percentage of deposits in 2013.
Walmart customers, many living paycheck to paycheck, are exactly the people most vulnerable to the cycle of abusive, high-cost credit offered by overdraft products. What’s more, as the Wall Street Journal’s profile of a Cleveland-area banking customer suggests, the fact that the bank is located inside a store known for its low prices may contribute to the misperception that fees represent some sort of a bargain, when in fact they may approach the cost of a payday loan. A Walmart spokesperson told the Wall Street Journal that the company: “has a "very thorough process" for vetting banks to which it leases store space, to ensure "they're in line with Wal-Mart's philosophy of saving customers money." Yet the Center for Responsible Lending warns:
Many financial institutions use abusive overdraft programs to unfairly drain their customers’ checking accounts, putting consumers on a treadmill of high-cost credit. Abusive overdraft programs drive consumers out of the banking system; indeed, they are the leading reason consumers lose their checking accounts. Overdraft programs also crowd out better products by removing incentives for banks to offer lower-cost, manageable ways to deal with financial shortfalls.
The Consumer Financial Protection Bureau, which found "wide variations across financial institutions regarding the costs and risks of opting in to overdraft coverage" in a study last year, is considering new regulations of overdraft products. In the meantime: buyer beware—especially if you bank at Walmart.