If you don't have $100 to buy groceries, which would cost you more?
A. Taking out a payday loan with a 450 percent annual percentage rate.
B. Overdrawing your debit card and paying the $27 fee.
Answers: B. The $27 fee on your debit card would equal a 704 percent interest rate.
That's another reason why anger at overdraft fees is getting hotter. Controversial bank account fees, which have fattened banks' bottom lines, are rapidly becoming a black eye for the industry.
Under siege are the fees charged to consumers who spend more than they have in their accounts, whether by check, debit card or at the ATM.
Last week, four of the nation's largest banks said they would scale back some of their overdraft policies. Their efforts, while meaningful, have failed to appease lawmakers, including powerful Senate Banking Committee Chairman Chris Dodd (D-Conn.), who is preparing legislation to crack down on what he calls a pattern of "abusive" practices.
At first glance, banks' practices seem reasonable enough: Overdraw your account, and the bank will cover the transaction -- for a fee. The problem is that most banks don't ask consumers if they want their transactions automatically paid.
In recent years, as banks realized how lucrative these fees can be, they've made it easier for consumers to overdraw their accounts, to the tune of $36.7 billion in revenue last year.
Banks have done this by covering debit card transactions as small as $1 and charging a fee as high as $35. Some also charge fees before consumers overdraw their accounts by deducting a purchase when it's made, instead of when it clears.
And they've processed transactions from highest to lowest dollar amount -- which empties consumers' accounts quicker and triggers more overdrafts.
Ironically, the changes banks have made to their overdraft policies are fueling calls to reform the entire industry. Overdraft coverage can be less regulated and cost more than other high-cost -- and equally criticized -- options, including payday loans, in the estimated $70 billion short-term credit market.
On average, consumers will pay a fee of $26.68 every time they overdraw their account, according to data from Moebs Services, an economic research firm. That means that if an account was overdrawn by $100, the account holder would pay an annual percentage rate of 696 percent, if the credit was paid back in two weeks.
This compares with an APR of 450 percent on a $100 payday loan with an average fee of $17.25.
When consumers overdraw recurrently, "It is a credit product, and they're paying eye-popping rates," said Federal Deposit Insurance Corp. chairwoman Sheila Bair, who is pushing for banks to get consumers' permission before covering overdrafts for a fee and to disclose APRs.
Banks say customers appreciate automatic overdraft coverage and the service helps avoid the embarrassment of a declined transaction. But they acknowledge that the fees can push consumers into distress.
Starting next year, Chase won't pay debit card overdrafts and charge a fee without consumers' consent.
Bank of America is reducing the maximum number of daily overdraft fees from 10 to four and letting customers opt out of this coverage.
"We've seen that the overdraft fees have become a bigger problem for customers," said Brian Moynihan of BofA.
Tam Tran, 36, of Columbia, Md., has paid his bank more than $5,000 in overdraft fees in the last year.
In 18 years with the bank, Tran said he had never had problems managing his money. But when his father went into the hospital, overdraft fees piled up for small-dollar debit card items. He repeatedly asked the bank not to approve transactions he didn't have money for and to stop clearing them from high to low dollar amount, but the bank kept doing so. He said the bank told him it approved his transactions because he had been a "good customer."