Overdraft Protection
Banks created overdraft protection programs as a service and accommodation to their customers


Overdraft protection is highly valued by consumers

  • Banks created overdraft protection programs as a service and accommodation to their customers. Paying an overdraft can save the consumer additional fees imposed by the recipient of a bounced check, such as a merchant or creditor, as well as additional interest and late payment fees.
  • Studies have validated the fact that consumers appreciate banks accommodating them by paying overdrafts and want their overdrafts paid when they make purchases or pay bills. In 2008, the Federal Reserve conducted consumer testing and found that 8 of 9 customers want overdraft services.
  • A recent study (August 2009) by the American Bankers Association found that 82% of bank customers did not pay an overdraft fee in the previous twelve months.
  • Of those who did pay an overdraft fee in the past 12 months, almost all (96%) said they were glad the payment was covered. Only four percent said they wished the bank had refused the payment.

Banks are authorized to process checks/post items in order that they deem most expedient

  • Banks may have differing standards or policies regarding the order in which they post checks and other checking account transactions. It is necessary to allow financial institutions to pay items in any order since an institution would have no way to know which items a customer would prefer to be paid or accepted.
  • The stakes are often higher for consumers’ larger check amounts, which is why many banks use the high-to-low method of check processing, where each day the largest transactions are processed first and the smallest last.
  • It is against the law for banks to process items in a manner for the sole purpose of generating increased fees. California commercial code states that banks are required to act in good faith and should not engage in practices that maximize returned checks for the sole purpose of generating returned check fees.

Not all transactions are processed in real time

  • Consumers should be aware that deposit transactions – checks, ATM, debit and credit card – may be presented to an account at different times.
  • Additionally, many overdrafts occur because a point-of-sale transaction is authorized, but subsequently at settlement there are insufficient funds due to additional transactions initiated by the customer in the interim.
  • Many companies, including merchants and retailers, do not have the capability to notify customers that they do not have available funds at the point-of-sale.

Overdrafts are preventable

  • Consumers have the option of linking their checking account to a savings account or applying for a line of credit to cover overdrafts. While fees may still apply, these are usually less expensive alternatives to overdraft fees.
  • Some financial institutions do provide an ATM message for their customers in advance of a cash withdrawal noting that the withdrawal would exceed the customer’s current available balance. The customer can choose to proceed – and may do so in response to an emergency situation.

To avoid overdraft fees, consumers should always be certain they have funds available to cover the purchase

  • Checking your balance has never been easier. Today you can check your balance by mail, in person, online, at an ATM or even from your cell phone or PDA.

Be prepared for new overdraft regulations taking effect this July

  • On July 1, 2010, the new Federal Reserve Board Regulation E rule goes into effect, requiring consumers to opt-in to their financial institution’s overdraft protection service for ATM and one-time debit card transactions before overdraft fees may be assessed on the account.
  • Failure to opt-in to a program means that consumers attempting to make a purchase with a debit card could have their transaction denied at the point of sale, instead of covered by their financial institution, if they have insufficient funds in their account.

Visit the Federal Reserve’s Web site to learn more about the new rules and what they mean to you.