The Consumer Financial Protection Bureau (CFPB) proposed to block banks and other financial institutions from one potential source of new junk fee revenue – fees on transactions declined right at the swipe, tap, or click.
The proposed rule would prohibit non-sufficient funds (NSF) fees on transactions that financial institutions decline in real time. These types of transactions include declined debit card purchases and ATM withdrawals, as well as some declined peer-to-peer payments.
Officials said the CFPB’s proposal is part of the agency’s proactive approach to protect consumers, and it would cover banks, credit unions, and certain peer-to-peer payment companies.
“Over the years, large banks and their consultants have concocted new junk fees for fake services that cost almost nothing to deliver,” said CFPB Director Rohit Chopra.
Chopra added, “Banks should be competing to provide better products at lower costs, not innovating to impose extra fees for no value. The CFPB will continue to rid the market of junk fees today and prevent new junk fees from emerging in the future.”
When a consumer tries to make a payment, but does not have enough money in their account, generally one of two things happens. One outcome is overdraft – the financial institution extends credit to cover the difference and permits the transaction to go through. Generally, the institution charges a fee for the overdraft loan.
The other outcome is that the financial institution simply declines the transaction for insufficient funds. Generally, the institution only charges a fee for insufficient funds transactions that are processed and then declined – i.e., checks or electronic authorizations, like Automated Clearing House transactions.
CFPB officials said financial institutions almost never charge fees for transactions that are declined in real time at the swipe, tap, or click.
For example, a $100 grocery purchase with a debit card may be declined in real time because the account only has $90. These types of transactions are not processed like Automated Clearing House transactions, and are generally not assessed fees.
The CFPB said it is taking proactive steps to ensure that financial institutions don’t impose these fees, which can occur for a host of reasons that are out of the consumer’s control.
Specifically, as technology advances, financial institutions may be able to decline more transactions right at the swipe, tap, or click, CFPB officials said. These transactions include ATM, debit or prepaid card, online transfer, in-person bank teller, and certain person-to-person transactions.
The officials said banks have previously increased fees when technology provided an opportunity.
Overdraft fees are a prime example, and the CFPB has proposed a rule to close the overdraft loophole that had allowed banks to capitalize on technological changes and charge consumers billions of dollars in overdraft fees every year.
The CFPB’s proposed rule would consider fees for transactions declined in real time to be unlawful under the Consumer Financial Protection Act.
CFPB officials said the proposed rule is also just one part of the agency’s work on protecting consumers from unlawful NSF and other junk fees.
In early 2022, the CFPB launched an initiative to scrutinize junk fees. Following the CFPB’s junk fee work, many banks and other financial institutions reduced or eliminated excessive NSF fees. The CFPB expects consumers to save $2 billion annually from these changes.