Banks should be required to warn customers whenever an ATM or debit card withdrawal is about to put their bank account in the red, according to the Center for Responsible Lending.
In a new study released last week, the nonprofit asserts that banks have the technology to inform customers when a particular transaction will overdraw an account and trigger a fee, but are reluctant to do so because it would slash revenue.
Industry experts say overdraft fees are the biggest single source of fee income in retail banking.
Consumers pay an average of $27.40 on every automatic overdraft loan to cover debits that exceed the account balance, according to Bankrate.com.
In annual percentage terms, that fee amounts to a median interest rate of more than 20,000 percent on overdrawn debit-card purchases, according to the study, which looked at the overdraft fees that banks and credit unions charge and analyzed 8,527 overdraft transactions.
U.S. consumers pay $10.3 billion annually in overdraft charges, about $7.3 billion of which comes from "chronic borrowers living on the margins," according to the Center for Responsible Lending.
Debit-card purchases are the leading cause of overdrafts, followed by paper checks, ATM withdrawals and online bill payments, the center's study found.
Banks contend that automatic protection saves consumers the cost of merchant fees on bounced checks. But almost half of all automatic overdraft charges result from ATM and debit card purchases, for which those merchant fees don't apply, said Eric Halpern, a spokesman in the Center for Responsible Lending's Washington office.
Banks also say they process overdrafts automatically as a service to customers, who would rather pay a string of $30 fees than bounce several checks.
The center wants federal regulators to require banks to warn customers when a purchase or withdrawal will incur a fee and to provide them a choice of whether to proceed with the transaction or cancel it.
The report points out that some banks already do this for their ATM customers.
Consumer advocates want the agency to alter federal rules that deem automatic overdraft protection a fee-service rather than a loan, a distinction the banking industry has fought to maintain.
The fee-service classification means that automatic overdraft programs do not have to comply with federal and state laws banning usury, or the charging of exorbitant interest rates.