Wells Fargo, Bank of America and Chase all made their automatic overdraft protection policies a little friendlier this week, but don’t think that the fee is gone or that the practice isn’t still pretty confusing.
Check out some of the terms:
Wells Fargo said it will eliminate overdraft fees when accounts are overdrawn by $5 or less and will charge no more than four overdraft fees a day. At $35, that can still run to $140 in one day.
Bank of America will eliminate the fee for overdrafts of less than $10 in a day starting next month. But its standard fee of $35 per item remains the same. The bank will start limiting the number of times customers can overdraw their accounts at the point of sale — but that won’t start until July, and the company hasn’t announced the limit.
Chase will eliminate fees if the account is overdrawn $5 or less and will reduce the maximum overdraft fees per day from six to three. The fees will continue at $25 for the first, $32 for the next four and $35 after that.
"I think it’s an absolutely great move by the banks. It shows they are listening to the marketplace," said Mike Moebs, president of Moebs Services, an economic research firm in Chicago. "But the price needs to be lowered, too."
Kathleen Day, spokeswoman for the Center for Responsible Lending in Washington, D.C., said the banks’ efforts aren’t enough.
"They’re still charging unjustifiable overdraft fees," she said. "Those fees are nowhere near the actual costs to the banks."
According to a survey by Moebs’ firm, the median fee for overdraft protection is $26. (Half the fees are higher than the median, and half are lower.) Moebs said about half of the fee covers the labor-intensive process of reconciling the account. The rest is profit, he said, and it has been steadily growing as the total fees collected have grown.
In 2009, U.S. banks should collect an estimated $38.5 billion in overdraft fees, compared with $18 million in 1999, according to Moebs. A July study of more than 2,000 financial institutions showed that 44.5 percent of banks and credit unions had overdraft fee income exceeding net income.
Overdraft protection is a relatively new phenomenon; 70 percent of banks have started programs since 2001, according to a study by the Federal Deposit Insurance Corp.
The process is also pervasive, with 75 percent of financial institutions automatically enrolling clients in overdraft programs, despite cheaper alternatives like linking a checking account to a savings account or a credit card.
Since 2001, the fees have been rolling in as consumers started using debit cards in earnest.
Automatic payments, ATM withdrawals and other banking conveniences, while handy, could routinely result in overdrawn checking accounts.
Instead of denying access to overdrawn funds, banks simply charged a fee for covering the withdrawal.
While 3 in 4 customers in the FDIC study never had an overdraft, the rest of the consumer base, usually younger or lower-income, could rack up hundreds, if not thousands, of dollars in overdraft fees annually.
Consumer advocates say such fees should be regulated.
"These charges underscore the need for Congress to actually set into law that these kinds of abuses are off-limits," Day said. "Before, banks said they didn’t have the technology to do it. Now, they’re trying to head off regulatory changes."
Congress is beginning to take notice.
Last week, Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, announced legislation to allow overdraft fees only when customers "opt in" to them, as they now do similar protection through linked accounts. Rep. Carolyn Maloney, D-N.Y., has introduced similar House legislation.
At the same time, the Federal Reserve is considering a new rule that would require banks to seek permission from their customers before enrolling them in overdraft protection programs.