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Congress looks to limit debit card fees

Bank customer uses ATM machine.

TEXT OF STORY

Bob Moon: Speaking of banking regulations, as we were a moment ago, and we have been for months now. You've probably heard that Congress has tightened up the rules on credit cards. But it seems debit cards are another matter. When we use plastic these days, there's a better chance it's a debit card. And for banks that had relied on late fees and interest charges, that's created a bit of a problem. So it seems they're looking to our new preference in plastic to make up the difference. And our Stacey Vanek-Smith reports lawmakers have noticed.


STACEY VANEK-SMITH: So you're low on cash, and you use your debit card for your morning macchiato, then comes the real jolt. That coffee just cost you $40. Because your checking account was empty, and the bank charged you a $35 fee to cover the purchase. It's called overdraft protection, and banks are expected to make more than $38 billion off it this year.

RON SHEVLIN: What you're really getting charged for is the bank's ability to charge you for it.

Ron Shevlin is a financial analyst at the Aite Group. He says these days banks are squeezing all they can out of debit cards because they're one of the few parts of the business that's growing.

SHEVLIN: They're issuing less and less mortgages and home equity loans, and less credit cards. And so the over-draft fees have been areas they have focused on generating a lot of revenue.

Banks say overdraft protection spares people embarrassment, but Eric Halperin, with the Center for Responsible Lending, points out that most banks won't let you opt out of overdraft protection. In that way, he says, banks have just found a way to turn debit cards into credit cards.

ERIC HALPERIN: Debit cards were originally marketed as this great tool for consumers, because it only allows you to spend the money you have. Banks turned that debit card now into a credit card that charges rates that no other credit card on the market does.

Congress is looking into regulating debit cards by letting consumers opt out of overdraft protection and making fees more reasonable. So instead of paying a flat $35 fee for your $4 machiatto loan, you'd pay something like a couple dollars, which would probably be a lot easier to swallow.

I'm Stacey Vanek-Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.
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It is really horrible when you see that the banks pays several small purchases in which you obvious notice on your online account. Then if a larger purchase is made that will over ride the smaller purchases, even two or three days later, They will retract the smaller purchases, pay the larger purchase, the charge you $35 for each of the smaller purchases. This is truly gouging.

And here we are with overdraft fees. We've got so much complaining over the fees associated with short term loans, but "overdraft protection" amounts to thousands of % in interest, annualized!

it's called an overdraft. Overdraft protection is when you are not charged the overdraft fee becuase the account is protected by another account that has available funds.

I've run a bank complaint site for a few years now and I have heard many stories where someone uses their debit card for many small purchases where $100 in spending creates a cascade of overdraft protection fees resulting in hundreds of dollars in overdraft fees. A few people have reported as much as $700 in overdraft fees in just a few days. I think most people expect that when their checking account has no money, an attempt to purchase something with a debit card will not succeed. Clearly banks are aware of this, which is why they opted to automatically enroll people in overdraft protection for their debit cards. I would be curious to know how much overdraft fees brought banks before the advent of automatic overdraft protection for debit cards. The most obvious way to solve this problem legislatively is to require banks to give people the information at the point of sale that they do not have enough funds in their account and the purchase will results in $$ of overdraft fees or to stop enrolling them automatically in these programs.

The overdraft protection that Vanek-Smith is referring to is not the overdraft line of credit, but the bank policy of "enrolling" you in a "protection" plan that will allow you to overdraw your acount and then face the 35 dollar fee for each transaction. Customers opening a new account with a bank should be able to "opt out" of this type of standard "protection" so that their card, if overdrawn, will decline any additional transactions - The way the cards were originally used and designed. THe overdraft protection that Vanek-Smith is referring to is most often unknown to the customer, but if the customer asks the bank about it, the response is often that they enroll you for your "convenience".

This is misleading: RON SHEVLIN: "What you're really getting charged for is the bank's ability to charge you for it."

No. What you're really getting charged for is your inability to keep track of your checking account. The bank isn't forcing you to pull out the card and use it without having a clue as to what's in the bank account. Or just not caring.

The debit card is just a plastic check. You bounce a check and you are penalized by the merchant or if overdraft protection covers the check so the merchant doesn't charge you then you pay the bank for that "privilege". It is a loan. Short and simple.

The debit card has just become the equivilant of "Well, I must have money in my account because look... I still have checks!".

I haven't the slightest desire to defend banks. Yuck. But the sense of the piece is that debit card users are just innocent bystanders getting dinged for breathing and they need protection to keep the bad banks away. The banks are absolutely greedy leeches but by using a debit card that is running on empty, the user is offering a bare leg and telling them to bite down hard.

There are certainly screw-ups and misunderstandings that result in fees but the majority are because people are spending money they don't have. No sympathetic characters in this story I'm afraid.

And here's a good link:
http://www.federalreserve.gov/pubs/bounce/

I'm glad to hear that Congress is finally looking into these outrageous debit card fees. I would like to also point out that the banks are not only charging for "overdraft fees", but now changing the policy on when deposits are actually credited to an account. Debit card purchases are accepted, but now the bank now charges a $35 fee, based on "pending deposits". Last March I had an outrageous amount of these "bank fees" in the amount of $1,805., most of which were charged against "pending deposits". I had been a regular customer of TD Bank for over 10 years, when deposits policies were changed, and I was not given the option to “opt out” of the overdraft protection. I consider these practices to be even more predatory than the high interest credit cards, where at least a credit card will be declined if the balance is not considered adequate.

The terminology in this piece is a bit off. Overdraft fees are not synonymous with overdraft protection, contrary to Ms. Vanek-Smith's usage. Overdraft protection is a pre-approved credit line that is automatically drawn upon in the event of an overdraft. They typically carry an interest rate of around 18%, plus a transaction fee of up to $10. Still onerous, but not in the same league with overdraft fees.

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