July 29 (Bloomberg) -- Tracy Hickman’s dinner for three at Taco Bell cost $11.99. She ended up paying $300 for overdraft charges triggered by the meal and other debit purchases.
Hickman says the expense resulted from delays in processing her child-support check at the Zanesville, Ohio, branch of Cleveland-based National City Bank. The 45-year-old customer- service representative said she uses a debit card more these days after canceling her credit cards because of high fees.
“I stopped using credit cards to keep me out of trouble and then got hit with overdraft fees,” Hickman said. “It’s not fair.”
Customers are shifting to debit transactions from charge cards as credit lines have been lowered and banks have closed inactive accounts. Debit cards will be used in 60.2 percent of card transactions in 2010, or about $40 billion, up from 58.2 percent in 2008, according to the Nilson Report, an industry newsletter in Carpinteria, California.
“Fee abuse hasn’t disappeared in banking with the credit- card legislation,” said Tony Plath, a finance professor at the University of North Carolina Charlotte. “It’s just migrated to checking accounts,” he said, referring to the legislation signed in May to protect cardholders from excessive fees and last-minute contract changes.
Charges related to overdrawn U.S. accounts may rise to $38.5 billion this year from $36.7 billion in 2008, according to data compiled by research firm Moebs Services Inc. in Lake Bluff, Illinois. Bank of America Corp. in Charlotte, North Carolina, the largest U.S. bank, charges customers $35 for transactions greater than $5 that have insufficient funds.
“By extracting these fees, banks are walking across the battlefield and shooting the wounded,” Plath said. “They should want to husband and protect deposit accounts rather than treat them as a cash cow.”
A consumer who overdraws an account by $20, repays the bank in two weeks and pays a $27 fee would be charged the equivalent of a 3,520 percent annual interest rate, according to a study released last year by the Federal Deposit Insurance Corp.
Financial companies have to increase their fees to counter loan-related losses and lower revenue, said Mike Moebs, chief executive officer of Moebs Services. Almost half of the 2,000 banks and credit unions surveyed by Moebs would be unprofitable without revenue from overdraft fees.
Hickman said she was evicted from her apartment after failing to pay her rent because of overdraft charges totaling $1,000. National City delayed depositing checks into Hickman’s account three times, which resulted in several overdraft fees when debiting groceries and gas, she said. National City, acquired by PNC Financial Services Group Inc. Dec. 31, declined to comment on the specifics of Hickman’s case.
About 25 percent of Americans paid at least one overdraft fee in 2007, according to the FDIC’s study. Banks will usually cover up to $500 in overdraft protection, Moebs said.
Since the Federal Reserve doesn’t require banks’ overdraft programs to comply with the Truth in Lending Act, they don’t have to disclose annual interest rates, said Jean Ann Fox, director of financial services at the Consumer Federation of America.
“With these ‘courtesy programs,’ banks are inviting you to park and then hitting you with a ticket,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston.
Other fees for insufficient funds include so-called sustained overdraft charges, which occur when consumers don’t repay the overdraft fee immediately, and tiering of overdraft fees, or increasing the cost each time a consumer overdraws an account.
JPMorgan Chase & Co. in New York charges a sustained overdraft fee from $12.50 to $25 if the loan isn’t repaid in more than five days, according to Tom Kelly, a spokesman for the bank. Bank of America recently added a $35 one-time fee for customers whose checking account balance remains negative for five days or more.
Consumers should be aware of how much money is in their accounts, and they can set up e-mail alerts or receive text messages for updates, said Nessa Feddis, senior federal counsel for the American Bankers Association in Washington. Consumers should be able to opt out of coverage, although most would prefer the bank steps in and takes care of important payments, such as mortgages, Feddis said.
Banks began covering consumers’ insufficient funds when they realized the potential fee revenue of permitting electronic transactions that overdrew the account, said Fox of the Consumer Federation.
The Fed will require all banks to disclose how much customers have paid in overdraft fees on statements beginning Jan. 1. It’s also considering whether institutions should be able to automatically enroll consumers in fee-based overdraft programs without obtaining prior consent, or allow consumers to opt out of coverage.
President Barack Obama’s proposed Consumer Financial Protection Agency would be responsible for regulating overdraft fees, according to Rebecca Borne, policy counsel at the Washington-based Center for Responsible Lending.
Representative Carolyn Maloney, a New York Democrat, introduced legislation in March that would require consumer consent for overdraft protection and alert consumers at the point of sale about insufficient funds.
“Consumers are currently enrolled at many major banks without their consent or knowledge and not even allowed to opt out once they’ve been badly surprised by excessive fees. It’s an issue ripe for congressional action,” said Maloney in an e- mailed statement.
Banks May Collapse
Legislation limiting overdraft fees may result in the collapse of almost 3,000 banks, especially community banks that rely on the fees for income. And consumers may see more returned checks, which also come with fees, and the demise of free checking, said Moebs, the economist.
To avoid overdraft fees, account holders should sign up for programs that transfer money from savings accounts when accounts are overdrawn or apply for coverage from the bank’s line of credit, both of which charge lower fees than traditional overdraft fees, said Fox of the Consumer Federation.
“Consumers need disclosure so they realize they might be spending an extra 3,500 percent when they pay debit for a bottle of shampoo,” said Jonathan Mintz, consumer affairs commissioner of New York City.