$29.5 Billion in Overdraft Fees? How the Big Banks Are Still Screwing Us
Remember when America’s big banks destroyed our economy, and then got bailed out by the government to the tune of trillions of dollars? And remember how, in the wake of that disaster, the government passed some important but relatively modest regulations to keep the banks from fleecing consumers – the very people whose taxpayer dollars saved the banks from ruin – quite as badly as they had been in the past? Well, it turns out that after all of that, banks are still doing wrong by Americans by quietly ratcheting up fees and not being forthright about their policies.
A new report from the Pew Charitable Trusts’ Safe Checking in the Electronic Age Project finds that, despite new rules meant to keep banks from increasing fees on consumers, banks that offer consumer checking accounts have increased fees in some cases, engaged in hidden-fee trickery and pushed high-cost, low-benefit services on customers.
The report looked at the 12 biggest banks in the country based on deposits, as well as the biggest credit unions, and found their practices and transparency to be lacking. One of the biggest ongoing problems is overdraft fees, those pesky $35-ish charges you get when you accidentally take out more cash than you have in your account. Pretty much everyone, even the most diligent of checkbook balancers, has had at least one overdraft fee experience. In the worst cases, it’s possible to rack up hundreds of dollars in overdraft fees without realizing it, even if you checked your account balance before you left the house, turning a morning of running small errands into one hell of an expensive shopping trip. (That $1.99 roll of toilet paper you bought? Suddenly it costs $36.99.) As with many of these penalties, it is often the people who have little or no wiggle room in their budgets who are hit hardest with the fees.
Consumer advocates have long targeted overdraft fees as an unfair practice, and new rules passed over the last few years were meant to keep banks from imposing quite so many overdraft fees on so many customers. Under guidelines passed in 2010, banks must give customers the right to opt in to so-called "overdraft protection" programs, meaning that unless you give your bank explicit permission, the bank must deny debit card purchases you try to make that exceed the amount of money you have in your account. The mild embarrassment of being rejected at the cash register in exchange for knowing you won’t accidentally spend more money than you'd planned, seemed, and seems, like a good deal.
Unfortunately, the banks found sneaky ways to keep increasing fees while technically adhering to these rules. For instance, although the opt-in programs are in place and the median overdraft fee has remained the same ($35), related fees, like the median charge imposed for automatically transferring money from another account in case of an overdraft, have increased (from $10 to $12). Likewise, the median fee for an “extended overdraft,” one that isn’t rectified within a certain number of days, went up, from $25 to $33.
About those “extended overdraft” fees: consumer advocates have noted that they are not unlike shady payday loans that charge consumers a tremendous amount of interest to get some needed cash in the short term. The Consumer Federation of America recently compared the two practices, and came up with some disturbing findings:
As it has before, the Consumer Federation reported the cost at each bank of a $100 overdraft repaid two weeks later as if it were a short-term loan. It said the best deal, at Citibank, was equivalent to a loan with an annual percentage rate of 884 percent. Some banks, including PNC and RBS Citizens, charge more than 2,000 percent.
Another thing: the banks examined in the Pew report have continued to reserve the right to process withdrawals by dollar amount, rather than chronologically. This practice “maximizes the number of times an account goes negative, thus increasing overdraft fees” – and the banks can choose to reorder transactions whenever they want, without telling their customers.
To make matters worse, bank customers on the whole remain terribly confused about their options, in terms of overdraft “protection” and other fees and services. The report found that the median bank disclosure form is still 69 pages long – shorter than the median form a few years ago, but still much too long. (Have you ever bothered to slog through the dozens of pages of disclosures from your bank? Of course not.) As Pew’s Susan Weinstock put it, “Consumers are expected to wade through long, confusing documents and may be subject to steep, unexpected fees to access their own checking accounts, the cornerstone of household financial management. Consumers must have understandable, transparent information that enables them to make educated choices when comparing one checking account’s costs and benefits to another.”
That’s how banks got away with charging Americans a staggering $29.5 billion in overdraft fees in 2011, according to financial research firm Moebs Services.
As you’d expect, some banks appear to be better than others about hidden fees. The Web site 24/7 Wall St. conducted its own analysis and found that the worst hidden-fee offenders are HSBC, Capital One and North Carolina-based Bank Branching and Trust, while Bank of America, JPMorgan Chase and U.S. Bank were more transparent.
As for a solution to these problems, the Pew report has several recommendations for Congress and the new Consumer Financial Protection Bureau: requiring concise, easy-to-read account terms, “reasonable” overdraft fees and better disclosure of overdraft options, for instance.
“An efficient market requires informed consumers who can make choices based on the product that best meets their needs. This is particularly important for an item as fundamental and significant as a checking account,” the report concludes. Indeed, nine out of 10 Americans is a checking account customer. And yet those millions of Americans continue to be screwed by the banks they helped bail out just a few short years ago. That just isn’t right.