What Do Banks Do With Insufficient Funds Fees?

Checking Accounts

A checking account is a type of demand deposit account that cash may be easily deposited to and withdrawn from. As the name suggests, checks may be written from a checking account, and the vast majority of banks now issue debit cards that allow holders to make payments from the account in the same manner as credit cards.

Banks deduct a fee each time a debit overdraws a checking account. This overdraft, or insufficient funds, fee is an administrative expense of roughly $30 that functions in two ways. First, the large amount is a disincentive for account holders to habitually overdraw their checking accounts (the fee itself extends the account further into overdraft). Second, the fee covers the costs to the bank incurred by the overdraft and is accounted for as revenue similar to other administrative or maintenance fees.

Often, a client holds savings accounts at a commercial bank in addition to a checking account. Many banks provide an overdraft service that allows clients to use the balance of a savings account to absorb any negative difference between a check and the balance of the checking account. Provided a sufficient combined balance between checking and savings accounts, the bank may charge only a small service fee per debit.

Since the early 2000s, overdraft fees have gradually grown to comprise tens of billions of dollars in revenue for American banks. While overdraft fees are generally viewed as a fair consequence, commercial banks have come under criticism for their administration. Some allege that banks take advantage of the larger of several debits on an account, processing them ahead of smaller ones in order to effect more fees through overdraft. As a result, many have called for legislation that would regulate the manner in which overdrafts fees are administered.