Regulators appear to be losing the battle against rising overdraft fees. Bank customers who sign up for overdraft protection services have significantly higher annual fees, a new industry report finds, and more involuntary account closures than those without one.

What began as a service to give customers flexibility with their accounts has turned into one of the banking industry’s biggest money makers, according to a report by the Consumer Financial Protection Bureau. “They’re a significant source of industry revenues,” CFPB director Richard Cordray said in a conference call. That wasn’t the way it was supposed to be, he says. Overdraft services began as “occasional courtesies” offered by banks, Cordray says, but now represent over 60% of fees from consumer checking accounts.

Since 2010, federal regulation has required financial institutions to get customer consent before charging overdraft fees. As a result, consumers typically have three choices when they have insufficient funds to cover a debit card transaction or ATM withdrawal. They can incur an overdraft penalty fee for a short-term advance, according to a 2012 report by the Pew Charitable Trusts; they can pay an overdraft transfer fee when the bank transfers funds from a linked account; or they can choose to have the transaction denied when they have insufficient funds, and pay no extra charge.

However, studies suggest it pays not to opt in to an overdraft program. Consumers with an overdraft program who overdrew their accounts paid an average of $225 in overdraft and insufficient-fund charges over the course of a year, according to the CFPB. The fees also varied widely: Consumers at some paid an average of $298 while consumers at others paid $147. What’s more, the Pew Charitable Trusts estimates that almost three-quarters of those who sign up for overdraft protection end up using the service. (The CFPB study did not include credit unions or banks with total assets under $10 billion, because they don’t fall under the CFPB’s authority.)

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Last year, consumers paid $32 billion in overdraft fees, up $400 million or 1.3% from 2011, according to a recent report by economic research firm Moebs Services in Lake Bluff, Ill. The rise came almost entirely from a greater number of overdrafts, says Mike Moebs, CEO and economist at Moebs Services. “People need more overdrafts due to a fall in net pay,” he says. Overdraft fees averaged $29 each in 2012, unchanged from 2011, but were up 5.4% from 2010 and 11.5% from 2009.

But the penalties for incurring too many overdrafts go further than fees. The involuntary closure rates of customers’ accounts were more than 2.5 times higher for account holders with debit and ATM overdraft coverage, the CFPB’s report concluded. Negative checking account balances are a significant contributor to involuntary account closures, according to the CFPB, which can leave a black mark on a consumer’s credit record and make it difficult to open another account. “Consumers need to be able to control their costs and expenses and deserve clarity on these issues,” Cordray says.