Sweeping Changes Coming to Protect Customers
From: "Sweeping Changes Coming to Protect Customers from Overzealous Bank Fees and Practices", The Times-Tribune.com, Jim Dino, 11/22/09
The popularity of debit cards has turned into a debt trap for consumers as banks routinely pay for their overdrawn transactions, then charge them hefty fees.
The banking practice has become so widespread and controversial that the Federal Reserve recently released a new rule to prohibit banks from automatically enrolling customers in overdraft protection programs, which charge fees when consumers spend more than they have. Starting July 1, all banks will have to ask their customers to opt in to overdraft protection plans for ATM and most debit card transactions.
More than 75 percent of banks nationwide automatically sign customers up for overdraft programs, according to a study by the Federal Deposit Insurance Corp. The new rule only affects overdraft fee services on ATM and one-time debit transactions. Banks will still be allowed to automatically enroll customers in overdraft services for personal checks and automatic transactions like monthly bill payments.
However, Congress is also looking to reform bank fees and further protect consumers from falling into debt on their checking accounts. The median overdraft fee is $27 but can be as high as $50, depending on the bank. The congressional bills are stronger than the Fed's action.
U.S. Rep. Paul E. Kanjorski, D-11, Nanticoke, along with Rep. Carolyn Maloney, D-N.Y., and Rep. Barney Frank, D-Mass., have introduced the Consumer Overdraft Protection Fair Practices Act. The legislation requires customer notification and acceptance when an ATM or point-of-sale debit card transaction triggers overdraft protection and associated bank fees. Many banks now automatically enroll customers in these programs.
- Requires banks to provide their customers with the option of enrolling in overdraft protection programs after receiving clear information about those programs.
- Prohibits banks from intentionally manipulating the order in which they process debits on customer accounts so as to increase and maximize their overdraft income.
- Requires disclosure of the terms and charges associated with overdraft programs and an opportunity for account holders to choose to have an overdraft plan or not.
- Cap the number of times banks can charged overdraft fees at three a year.
- Tell customers when their account is on the verge of being overdrawn so they can decide whether a purchase is worth an overdraft fee.
The legislation, which faces stiff opposition from the banking industry, would also cap the number of overdraft fees consumers can be charged and tie the fees to the transactions' processing costs.
A similar bill is pending in the Senate. The Senate would empower banking regulators to set overdraft fees in a way that is "reasonable and proportional" and disclose to consumers details about how an overdraft charge was incurred and what can be done to fix an account balance on the same day the overdraft fee is charged.
The congressional proposals would not go into effect until one year after passage, though they would prohibit banks from increasing overdraft fees in the wait time.
For banks, overdraft fees are a large revenue generator because so many people use debit cards. About 75 of 100 financial transactions are electronic, according to Moebs Services Inc., an economic research firm. The financial services industry is expected to make $38.5 billion this year on overdraft and non-sufficient fund fees, up 38 percent from $27.9 billion five years ago, Moebs estimates.
In light of legislation to reform overdraft fees and practices, many banks have already taken steps to alter how they handle overdraft protection and fees.
"The advent of the check card has changed the landscape," said Robin Hitchcock KNBT Bank senior vice president for development. "It's hard to keep track of transactions with a check card. While a check card is a convenient way of accessing your funds, the card also creates issues with the consumer, with the way merchants settle their transactions."
In some cases, such as when a check card is used at a gas pump, the card will allow the consumer to pump the gas regardless of how much money the consumer has in his or her checking account because the transaction is charged as a $1 debit until the bank settles the transaction, said Ms. Hitchcock.
"People can slip through the cracks like that, and get assessed the overdraft fee," she said. "We are working with our technical people to see how the electronics creates this situation and to come up with an answer."
Wells Fargo, which bought Wachovia, has also made changes to its overdraft practices for its customers. Wells Fargo will eliminate overdraft fees for customers when they overdraw their accounts by $5 or less and will charge no more than four overdraft fees per day.
Wells Fargo and Wachovia customers can also opt out of overdraft coverage, meaning customers can specify that they don't want their transactions authorized into overdraft if funds aren't available to cover the transaction.
"We want to deliver the best banking experience we can and believe these changes, in addition to the tools we already provide, will help our customers minimize overdraft fees," said Carrie Tolstedt, Wells Fargo senior executive vice president and head of Community Banking. "Most of our customers don't need overdraft coverage in any given month, but for those that do we hope these changes, along with the tools we already provide, will help them minimize overdraft fees. We continue to encourage everyone to manage their accounts and always monitor their balances because these are the best ways to steer clear of overdrafts."
Bank of America instituted a new policy a few weeks ago that gives customers a $10 cushion if they overdraw on their accounts.
"We certainly recognize that even people who manage their finances closely make mistakes," said spokesman T.J. Crawford. "The $10 cushion will prevent an overdraft fee from occurring for those using a debit card. We don't want to see their account pushed into negative territory because they charged a cup of coffee."
Next summer, Bank of America is also planning to offer customers the opportunity to choose whether or not they want overdraft protection, he said.
Chase Bank revamped its overdraft policies in September, eliminating overdraft on debit cards unless customers opt in for overdraft services, said spokesman Mike Fusco.
"This subject has gotten a lot of attention," Mr. Fusco said. "Certainly, a lot of legitimate issues have been raised. We have tried to be thoughtful for customers, about what the right thing is to do for customers."
At The Cross Valley Federal Credit Union if a customer has overdraft protection, the union will refund any overdraft fees if the customer makes a deposit to cover the overdrawn amount on the same day, said Gina Murmello, manager of the Hazleton Branch of the credit union. If a customer also has a savings account at the credit union, money will be transferred from that account to cover the overdraft charge and the customers will incur a $2 bank fee for the service, she said.
FNCB Bank has a similar policy in place, said Christine Gresh, manager of the FNCB branch in Hazleton.
"We also have a feature called bounce," she said. "The bank will pay up to a certain amount, depending upon the account and the charge attached. People know all about this service going into the program."
A few weeks ago, PNC Bank enacted a new policy to lower the rate of the first overdraft occurrence in a 12-month period from $31 to $25, and to remove the maximum number of overdraft occurrences per day from 10 to four. Next June, PNC will eliminate overdraft fees for overdrafts of $5 or less.
"All new customers can opt in for an overdraft protection plan," said PNC spokesman Fred Solomon. "The bank will cover the overdraft, but charge the customer a fee. Our existing policy is that the customer can opt out of the protection plan at any time."
PNC also allows Check Card accounts to be linked to other accounts so the other account can be tapped into to cover overdraft transactions.
M&T Bank also links accounts to cover overdraft charges and recently capped the number of insufficient funds fees to six. M&T now charges $18 for an overdraft on the first day of a 12-month period. After that first instance, the charge is $36, he said.
Next year, M&T will not charge an overdraft fee if on transactions less than $5, he added.
At Susquehanna Bank, officials encourage customers to avoid overdraft fees by keeping track of the balances in their accounts.
"We feel overdraft fees are something people can avoid," said Steve Trapnell, the bank's corporate communications manager. "We encourage our customers to balance the transactions on their account, and not to border zero on their balance. At any given time, customers know the balance on their account better than a bank does, because a customer can write a check the bank does not know about until it is turned in."
Written By: rnybeck
Date Posted: 3/3/2010
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