In recent years, overdraft fees made billions of dollars for banks, but only worsened the hangover for a debt-addicted nation. Now, amid an overhaul of financial institutions and their services, consumers are seizing their moment to cry foul.
The Federal Reserve ends a public comment period this month to determine whether banks' current handling of overdraft fees needs to be changed. In the process, its Web site has become a sounding board for Americans' frustration with all things banking, from billion-dollar bailouts to the average $27 fine for overdrawing on an account.
For example, Brian Shriver in Atlanta, Ga., writes: "Such fees are obscene and immoral. The lesson I learned is that I can't trust my bank to avoid the temptation to rip me off royally."
Overdraft fees usually work like this: A customer makes a purchase -- in Mr. Shriver's case, say, $12.21 at Waffle House -- but doesn't realize his account doesn't have enough for the transaction. Rather than decline his card or alert him, the bank allows the transaction to proceed, so Mr. Shriver isn't aware that his account is negative -- or that he has incurred a $35 overdraft fee -- until he checks his balance online.
Banks can charge a customer $10 to $38 when there are insufficient funds.
"It's deeply unfair," said Mr. Shriver, 43 years old, when reached by telephone. He wrote to the Fed in exasperation after a series of small purchases he made last month racked up $525 in overdraft fees. "I'm mad at my bank but I'm also mad at the system," he said. "There needs to be more oversight so these fees aren't so extortionary."
Most banks and credit unions automatically sign customers up for what they call overdraft "protection," that allows -- rather than blocks -- purchases and ATM withdrawals that overdraw their bank accounts. For this service, the institutions charge customers fees ranging from $10 to $38 per overdraft, according to a study released last November by the Federal Deposit Insurance Corp.
Some 86% of banks the FDIC surveyed had overdraft programs in place in 2006, and three-quarters automatically enrolled customers in such programs. The survey also found overdraft fees were most common among young adults, ages 18 to 25, and low-income accounts. A separate analysis from Mike Moebs, who runs Lake Bluff, Ill.-based Moebs Services, a research and consulting firm, shows banks and credit unions earned $36.7 billion in consumer overdraft revenue last year, about three-quarters of their total service charge income.
Several factors contribute to banks' success with such fees, namely the ubiquity of debit cards and the fact that fewer Americans pull out -- let alone balance -- checkbooks anymore, favoring the cards and online banking. The number of debit-card transactions in the U.S. surpassed credit cards for the first time in 2004, according to data from the Nilson Report, and debit usage has grown nearly 50% since then to about 33 billion transactions last year, versus 24.6 billion for credit cards.
Last year, Jennimaria Palomaki, a scholarship student at the University of Georgia who works part-time to support herself, unwittingly racked up nearly $200 in overdraft fees on a series of small purchases she made without realizing her balance was negative. "I live paycheck to paycheck and I always check my balance online," she said, "but sometimes you don't realize a charge has gone through and every one of these little purchases is overdrawing your account." Paying off those charges meant she couldn't afford to buy her boyfriend a gift for Valentine's Day.
"I understand the banks have to protect their own interest. I get that," she said. "But it feels like I'm being stolen from when I get this huge fee for a small purchase."
People like Mr. Shriver and Ms. Palomaki say this isn't fair. They want the option either to opt out of the service altogether or to be told when they're about to make a purchase that will overdraw their accounts and incur a fee. "There's no alert system," Ms. Palomaki said.
"That's the biggest problem." She and others also object that when several purchases happen simultaneously, banks process the largest ones first, so that each subsequent smaller charge incurs a fee.
The Fed is considering a number of different approaches, ranging from no change in current practices to requiring banks to give notification on every purchase that would result in an overdraft, but many institutions say the latter isn't realistic. "People think when they're making a purchase it's like a direct line into their account but it's not; it's a third-party processor making the transaction," said Judy Rigwood, compliance director at the TLC Federal Credit Union in Oregon, with five branches and about $90 million in assets. "We don't have the technology to do that."
She and others say the only real option is to allow customers to opt entirely in or entirely out of overdraft service. Those who opt out would see their cards declined on those purchases exceeding the amount available in their checking accounts. "Frankly we offer overdraft service as a way to help our members," Ms. Rigwood said. "Some people rely on it almost like they would a payday loan. It allows them to make vital purchases."
The Fed's 60-day comment period will end March 30, but it will likely take several weeks or months for officials to comb through the 80-plus pages of outcry posted so far on their Web site, under "Regulation E," and issue a ruling.
Mr. Moebs said he wouldn't be surprised to see the Fed require banks and credit unions to break down transactions into four broad types -- ATM withdrawals, automated payments, debit-card purchases, and check purchases -- and allow customers to pick which types they'd like to carry overdraft protection, starting perhaps on Jan. 1, 2010.
"I think that's great, but who's going to pay for it?" he said, estimating the cost of banks' updating their programming and technology to comply in the $25 million to $40 million range. "Since the Fed is saving everyone these days, are they willing to cough up?"
He and others in the industry say it isn't clear how much ramped-up regulation would benefit consumers, especially if it prompts banks to cover the cost of new regulation and make up for the lost fee income by restricting debit-card usage or imposing fees elsewhere, such as on free checking accounts.
"Somewhere or another these costs have to be covered," said William Cooper, chief executive of Wayzata, Minn.-based TCF Bank, an $18 billion company with some 450 branches and 1.8 million checking accounts. He said it could mean the end of free checking, which his bank pioneered over 20 years ago. "Instead of that monthly charge we get debit-card fees, ATM fees and so on that make up the difference. If you take those away it's pretty clear what will happen; we'll have to go back to $10 a month," for checking accounts, he said. "Then everyone will end up paying for it."