A bank overdraft fee is a fine that banks might charge members for drawing more money out of an account than was available. Many banks allow members to opt in for overdraft protection, which provides ways for members to avoid punishing overdraft fees. Without overdraft protection, some banks have been known to penalize members up to $30 US Dollars (USD) or more for each underfunded debit transaction. Some banks, however, do not penalize members with overdraft fees, choosing instead to simply refuse a transaction due to insufficient funds.
A scenario resulting in a bank overdraft fee might go like this: a member of Bank XYZ purchases groceries at the store for a total of $65 (USD). Their account, however, only contains $20 USD. The bank, unbeknownst to the member, honors the transaction anyway, covering the difference of $45 USD. The individual must pay the bank back the $45 USD, resulting in a negative account balance. On top of that, a bank overdraft fee of $30 USD is added to the account, resulting in a total negative balance of $75. The member, still unaware that his or her account has no funds, decides to purchase a cup of coffee on the way home for $3 USD, which results in another $30 USD overdraft fee. By the end of the day, the cumulative negative account balance has come to -$108 USD.
Many banks have traditionally offered options for overdraft protection. For example, if a member meets certain criteria, the bank may, instead of charging an overdraft fee, pull funds out of that member's savings account to cover the negative balance. This provides the member with a much more affordable safety net. Members may also instruct the bank not to allow their account to be overdrawn, and instead to simply decline transactions for which there are not sufficient funds.
It has long been a matter of dispute whether the practice of charging a bank overdraft fee is a fair penalty, or a shameless way for banks to profiteer at the expense of members. In the U.S., an overdraft protection law went into effect on July 1, 2010, which required banks to ask members whether they wished to opt into bank overdraft fees. The law was meant to reform the banking system by giving more leverage to bank members, many of whom felt fleeced by banks who did not properly inform them of possible overdraft charges. Under the new U.S. law, banks can only charge a member a bank overdraft fee if that member has signed a form stating that they understand the possible fees associated with allowing their account to be overdrawn.