Banks earn huge revenue through checking account overdraft fees

Checking accounts are fast disappearing and the banks are now charging excessive fees on all their services when compared to charges in the past. Either they have increased their fees or they have limited number of transactions that you are allowed on your checking accounts before the fees kick in.

As per the results of the study conducted by PEW charitable trust on the 10 major banks, it was found that the banks were making huge profits on the overdraft fees which had increased to more than $20 billion since the last decade. The main aim of the organization is to make checking accounts more transparent and in order to have more responsibility, fairness and follow free market principles.

The study conducted by PEW has been titled – The Hidden Risks: The Case of Safe and Transparent Checking. Investigations were carried out on the cost of overdraft penalty fees as well as the other fees on the checking accounts that have increased over the years. The overdraft fees on all checking accounts were at $18.6 billion in 2000 and there has been an increase to $38.5 billion in 2011. Hence, the overdraft fees at the moment can roughly be equated to an APR of 5,000% according to the report. The study has however recognized the fact that banks also risk losing their money on these overdrafts on checking accounts just in case it is not paid. However, banks are not clear and transparent in letting account holders know the risks that are involved with these fees.

The PEW researchers had collected data sometime during October, 2010. At the time the data was collected, all of the 250 types of checking accounts that were offered by these 10 major banks, had the right to re-order the withdrawals from the higher amounts to the lower amounts and this means that in case of an overdraft the banks can impose multiple overdraft fees on smaller amounts instead of clearing the smaller amounts on priority and having just one big amount where they can charge overdraft fees.

Added to this, at least 8 out of the 10 major banks that were part of the study had reserved the right to post withdrawals first instead of the deposits. This again increased chances of charging overdraft fees. Pew also observed that although many of the banks had changed these practices, there were still a large number of them that indulged in these tactics. The average overdraft penalty fee is $35 according to findings.