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Money Matters: Bank customers v. overdraft fees
A new study that finds Americans still paid $30 billion in overdraft fees last year despite efforts to curb them.
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Jeremy Hobson: The state of our checking accounts is not strong. That's according to new research by the Pew Charitable Trusts, which says, among other things, overdraft fees are still too high.
For our new segment Money Matters, we're joined by Tess Vigeland who hosts our consumer finance show, Marketplace Money. Good morning.
Tess Vigeland: Good morning, Jeremy.
Hobson: Well Tess, I thought that this whole issue of overdraft fees was taken care of in the new Dodd-Frank financial reform bill. What's the deal?
Vigeland: Yeah, you know, we thought a lot of things were fixed there but apparently checking accounts weren't one of them. They're way too confusing for so many consumers now. Do you know how many pages the average disclosure form is? Take a guess.
Hobson: Oh boy, like five pages?
Vigeland: Try 69. Sixty-nine pages for a checking account, Jeremy. And that really gets consumers so confused that then they end up falling into overdraft territory -- they don't know how, they don't know why. So this report is recommending that banks really simplify these disclosure forms, like they've done for many other things; now let's do it for checking accounts.
Hobson: But I can hear the other side saying, 'look, why should consumer banking be totally risk-free? Shouldn't banks be able to charge people when they don't have the money that they are trying to spend?'
Vigeland: And it's a good point, and there's all kinds of cases for personal responsibility here. But the banks, you know, they're trying to come up with all kinds of fees because so many of those fees have been tamped down on recently. But there is a difference between making money for providing a service, and sneaking these fees in on people who don't know that they're coming. For example, if you cash checks out of chronological order, that pushes you into having to pay multiple overdraft charges. And people just don't realize that this is happening.
Hobson: Well now we have the Consumer Financial Protection Bureau -- are they going to do anything about this?
Vigeland: Well we called the agency up, they didn't have any comment. But they have been looking at checking accounts for a while now, back in March. They asked for comments on checking accounts, and also on overdrafts from consumers. So if you have something to say, give them a holler. We know they're compiling a bunch of data in advance of putting out some kind of report.
Hobson: Tess Vigeland of our weekend consumer finance show, Marketplace Money. Thanks a lot, Tess.
Vigeland: Thanks Jeremy.
And we cannot forget this trap still in use today:
Update: Bank of America settled a lawsuit for $410 million concerning this issue below.
In his documentary film Overdrawn!, Karney Hatch mentions that banks often post your deposits and withdrawals to your bank account in such a way that they maximize the possibility of overdrafts. Even if you believe you have a large enough balance to cover your withdrawals thanks to recent deposits, the banks have a way of calculating debits and credits that can result in multiple overdrafts in one day.
Here is how this works, supposedly. This is the scenario: you know that you have an automatic electronic withdrawal that will be executed today, perhaps to pay your mortgage or cable bill. You realize that you may not have the money in your account so you run to the bank and make a cash deposit to cover the withdrawal. Or perhaps you are aware of the impending withdrawal the day before, so you execute a transfer from one account to another online. In your scenario, the final withdrawal and deposit are executed on the same day.
According to experience with many banks, no matter what time your withdrawals and deposits are processed on any one day, the bank will apply your withdrawals first, from largest to smallest, then apply your deposits. So if you have $100 in your account at the beginning of the day, and you have instructions to pay your mortgage of $1,500, your cable bill of $75, a cash withdrawal at an ATM during the day for $80, a debit card purchase at the grocery store for $10, and a scheduled ACH transfer for $2,000, the bank will process your mortgage first, dropping your account below zero and incurring your first overdraft fee.
The bank will then reduce your balance by the amount of the cash withdrawal. Even though you’re already below zero the bank will charge you a second overdraft fee. Next, the bank will process your cable bill, resulting in the third overdraft fee. Your debit card purchase will be posted next, incurring an average fee of $30 for your $10 purchase. You’ve now been charged $120 in overdraft fees alone.
Finally, the bank will apply your deposit, bringing your account balance positive again.
This technique has been observed, and banks have even admitted to this practice. Yesterday, Consumerism Commentary reader Steve claimed that this is not the policy at Wachovia, nor is it the policy at most banks. So I called Wachovia, Wells Fargo, Citibank, Commerce Bank (TD Bank) and Chase to try to extract the official policies from the customer service representative or salesperson
I can't speak to the veracity of your information but if true that is a problem that a simpler UA won't solve. As you noted, the practice is contrary to their stated policy so restating the policy isn't going to change the practice. Change your bank if you don't like how they process your payments.
That said, I have only once experienced something like this and Citibank not only agreed it was an error right away but corrected the error promptly, returning the overdraft charges they have taken. I have on multiple dates both deposited checks and bills with both Citi and TD and aside from that one time never experienced the practice you outlined. As these things are all automated I find it hard to believe that your information is correct about the screwy timing. But who knows, there could be an algorthem problem with a specific combination....
But again change your bank if that is happening. Go to a credit union or local bank. Though I would support standards that prevented banks from screwing around with timing of deposits and withdrawals.
Making user agreements simpler will not, in my opinion, make a big difference. People don't read agreements and those who do are likely to ask their banks the questions necessary to manage their money effectively. The change in rules introduced by Dodd Frank were largely reasonable as they allowed choice but funneled that choice towards lower fees. BUT if people are still getting hit with fees then that is on them. Also, if a bank could offer the same services for cheaper don't you think they would do that?? There is lots of competition out there so it seems unlikely that these fees are over priced. Transparency is good but it isn't the be all and end all. You can't regulate smart. You can only give people the tools. While that might sound on the surface as an endorsement for a simpler UA it isn't. The UA's have lots of good information in them and what is extraneous to you may be very relevant for someone else.
