We need to stop throwing away billions on overdraft fees

Mason jar with pennies spilling out

Remember when the Federal Reserve handed down a rule that in 2010 stopped banks from automatically enrolling their customers in programs that charged bank overdraft fees?

It was supposed to prevent banks and credit unions from collecting cash from people who can least afford more fees.

It failed.

In 2011, U.S. consumers paid $31.6 billion in bank overdraft fees, according to research firm Moebs Services.

That’s down from the zenith of overdraft penalties in 2009 when bank customers paid $37.1 billion.

But it's still an outrageous scam perpetrated on millions of Americans with no interest in having the banks cover for them when they have insufficient funds in their accounts.

In fact, a new report from an arm of the Pew Charitable Trusts shows that a whopping 75% of people it surveyed said they would rather have their transaction declined than pay an overdraft fee if they don't have enough money in their account.

We see two reasons why the Fed's rule has failed.

First, the rule hasn't prevented banks from offering overdraft coverage.

It simply requires banks to get people to opt in when it comes to debit card and ATM transactions. (You can still get charged if you overdraw on an account based on a check you've written or an online payment.)

So the banks spend millions making a full-court marketing press to get people to opt in to what they are still calling "overdraft "protection," which offers no protection at all -- except to the banks' bottom lines.

Second, the Fed does not work for us.

According to a 2011 Pew report, the Fed's rule was not beneficial to consumers.

"The Fed's model opt-in form describes overdraft penalty plans as the 'standard overdraft' option and only briefly mentions the existence of other alternatives," says the report. "While a description of price and the circumstances under which the overdraft penalty fee will be assessed is included, the model form does not include the price of overdraft transfers."

There's more: "In addition, the Fed's form does not discuss the option not to opt in to overdraft coverage, a choice that would allow customers to avoid exceeding their available balance or incurring any overdraft fees."

Calling overdraft protection standard, not including information about actual fees (now averaging an all-time-high $30) and adding very little about alternatives that are fee-free -- this is what the Fed is giving you.

It's as if the banks themselves wrote the language and handed it over to the Fed.

This debacle highlights again the need for a watchdog agency like the Consumer Financial Protection Bureau, which in February launched an investigation into overdraft practices that will actually look out for consumers, not just posture to do so while bending to the whims of the banking industry like the Fed has.

What can you do?

Check your account to make sure that you haven't enrolled in one of these plans that offer no protection. If you have, it's time to opt out.

We need to stop throwing away billions of dollars for this dubious service.