For the past year, banks have raised credit card rates to levels that sparked consumer outcry, regulatory scrutiny and congressional action. A law President Obama signed last week aims to stop the most egregious practices.
But even as outrage was building over credit cards, banks seized upon another way to squeeze profits out of struggling consumers: higher checking account fees. These fees can add up to hundreds of dollars before consumers know there's a problem.
As the economy struggles to climb out of a recession, banks are extending some of their most profitable — and controversial — credit card practices to checking accounts.
For example, banks are making it easier and more punitive for consumers to spend more than they have in their checking accounts, just as they allow consumers to spend past their card limits and charge them a steep fee for doing so. Some analysts believe that new credit card restrictions will only accelerate fee increases on bank accounts.
"This is Business 101," says Adam Levitin, a law professor at Georgetown University. "If you take losses in one area, you try to offset them in other areas of operations."
In June, Bank of America (BAC) will raise its monthly fee on certain checking accounts and impose a fee on accounts that remain overdrawn.SunTrust (STI), meanwhile, is starting to charge customers a higher fee when they overdraw multiple times. Wachovia, now a part of Wells Fargo(WFC), has made it more expensive for some customers to transfer funds to cover overdrafts. And Citigroup (C) has raised foreign-transaction fees on debit cards.
At a time when the government has bailed out many of the largest banks, the moves are drawing the ire of economists who say they threaten to further undermine consumers' financial stability.
Unemployment has reached 8.9% — a nearly 26-year high — and consumers are falling behind on their bills at a record rate. While the economy is showing signs of improvement, consumers' troubles are far from over.
"It's a double whammy," says Michael Moebs, founder of Moebs Services, an economic research firm in Lake Bluff, Ill. "The American consumer as a taxpayer was asked to put up $700 billion (for bank bailouts), and now they're getting another whammy from banks increasing fees."
Banks are raising account fees because of a "mix of market power and opportunism," says Simon Johnson, a former chief economist for theInternational Monetary Fund who teaches at MIT's Sloan School of Management.
"They are supposed to act in the interest of shareholders, so they're gouging consumers."
Banks defend their policies, saying that as unemployment rises, consumers have become riskier, and the higher fees reflect that risk. Banks may also be raising some account fees to compensate for higher borrowing costs and to keep prices in line with other financial institutions, says Scott Talbott of the Financial Services Roundtable, which represents the nation's largest banks.
'These fees are like germs'
But the aggressive fee increases, consumer advocates say, underscore the need for regulators to crack down uniformly on bank practices that are pushing consumers deeper into debt — whether on credit cards or checking accounts.
"These fees are like germs. They have a tendency to spread," says Gail Hillebrand, senior attorney at Consumers Union, which publishesConsumer Reports.
The fees are "all based on the same bad business model," she says, in which consumers are promised one price and then later are loaded up with back-end fees.
Sen. Bernie Sanders, I-Vt., says efforts to reform credit card and bank practices don't go far enough.
"We need serious and major regulatory reform over these institutions or they will continue to rip off people in every way imaginable, with outrageous fees snuck in every single place," he says.
Chelsea Reyes, 25, got hit with almost $600 in fees for 17 overdrafts — five on small-dollar-amount transactions ranging from $2.67 to $7.09 — during three days in May. Reyes says she had sufficient funds in her Wells Fargo accounts. However, she mistakenly transferred money into savings, causing her to overdraw her checking account.
With three young boys, money is already tight, she says. But the overdraft fees cleaned out the savings she and her husband, J.C. Reyes, had been building up. Although the bank later refunded $227.50 in fees, Reyes says she was forced to borrow $500 from Wells Fargo's Direct Deposit Advance service to pay back the rest.
"If I didn't do the advance, I don't know how I'd buy formula for our son," says Reyes of Novato, Calif.
Reyes acknowledges making a mistake but says she doesn't understand why the bank would let her repeatedly overdraw her account without immediately notifying her.
Wells Fargo spokeswoman Richele Messick says overdraft fees are avoidable and that, like other banks, the bank provides balance alerts and online account access to help consumers track their money. Consumers also can sign up for less-expensive overdraft protection, she notes, linked to savings or a credit card.
Banks say overdraft fees compensate them for the transactions' cost and the risk that consumers won't pay them back. "Most people don't think of overdrafts as a loan, but they are a loan," Talbott says. "They're exactly like credit cards. There's no collateral for them."
Problem is, these loans are among the costliest types of credit available, some analysts say.
If consumers overspend by $20 — the median amount of a debit card overdraft — and get charged $27, their effective annual percentage rate would be 3,520%, assuming they paid the money back in two weeks, a 2008 report by the Federal Deposit Insurance Corp. found.
Overdraft coverage boosts banks' bottom line while taking a toll on consumers' wallets.
The FDIC study found that overdraft fees represented 74% of banks' service charges on deposit accounts.
Overall, the fees are likely to cost consumers $39 billion this year, up 6% from last year, Moebs Services estimates.
These fees, on top of banks' widespread rate increases on credit cards, threaten to "precipitate a downward debt spiral" for the most vulnerable consumers, says Chi Chi Wu of the National Consumer Law Center.
Some in Congress hope to address controversial overdraft practices, but others fear these efforts will be overshadowed by long-awaited credit card reform that Obama signed last week. Rep. Carolyn Maloney, D-N.Y., has sponsored a bill that would require banks to get consumers' consent to pay overdrafts. Banks also would be required to notify consumers at the cash register or ATM of insufficient funds and allow them to cancel the purchase.
Curbing overdraft practices is as vital as card reform, Maloney says, because "especially during this economic downturn, Americans want and deserve greater control over their finances."
The Federal Reserve is weighing whether to crack down on automatic overdraft protection. But advocates say a Fed rule — expected later this year — won't tackle the worse abuses.
The agency's proposed rule, for instance, doesn't cap overdraft fees, require banks to disclose the overdraft interest rate or prevent them from "manipulating" the order of checks and debits to maximize overdraft fees, says Jean Ann Fox of the Consumer Federation of America.
The question the government needs to answer in weighing reform, says Peter Tufano, a senior associate dean at Harvard Business School, is "if fees help banks improve their financial health but weaken consumers' financial health, is this a net good or bad for the economy?"
Tufano says banks should be able to come up with business models that deliver sustainable profits without hurting consumers.
Overdraft fees aren't the only ones rising.
ATM fees, monthly service fees and balance requirements for interest checking accounts all hit highs in 2008, before adjusting for inflation, according to Bankrate.com, a bank comparison site. Even after inflation adjustments, ATM fees are at record levels.
In 2009, consumers should expect more of the same. Says Greg McBride, senior analyst at Bankrate.com, "A lot of these fees will continue to march higher as long as the sun rises in the East."
Bank of America, the nation's largest bank based on assets, is raising some account fees because of the bank's higher costs and consumers' increased riskiness, spokesman James Pierpoint says.
In June, Bank of America will increase its monthly account-maintenance fee on its MyAccess checking to $8.95 from $5.95. The bank will also begin charging a one-time fee of $35 if consumers' accounts remain overdrawn for five business days. And it has increased the number of times customers can get hit with overdraft fees per day to 10 this year, from five last year.
Wachovia is doubling — to $10 — the fee to transfer money to checking to cover insufficient funds on some accounts. The bank will also start charging that fee to a credit card, rather than taking it from a linked bank account, meaning consumers could pay interest on that amount.
Michael McCoy, a Wachovia spokesman, says the fee increase is an attempt to assess the same, "consistent fee" across multiple accounts.
But Stephen Lerner, assistant to the president of the Service Employees International Union, which has 2 million members, says that checking accounts have increasingly become "the gateway to a cycle of never-ending debt."
"Banks lure you in," he says, "and then do everything they can to attach fees."
Some new bank fees are strikingly similar to those that have already taken hold on credit cards. For instance, SunTrust began charging in May a higher fee on its basic checking if customers overdraw multiple times — similar to what banks have done with late fees on credit cards. The bank also raised its overdraft fee on other bank accounts. SunTrust says its changes are "consumer friendly." Despite higher overdraft fees on premier accounts, the bank will automatically waive one to three overdraft charges a year on these accounts, spokesman Hugh Suhr says.
Meanwhile, Citigroup began charging 3% of the transaction for certain debit card purchases and ATM withdrawals made outside the U.S. last year, up from 2% — and in line with the company's fees for foreign credit card transactions.
The bank says its fund transfers to cover overdrafts are now rounded to the nearest $100 to provide consumers with a "cushion" for additional transactions. The bank is also deducting a $10 transfer fee from checking instead of savings.
These changes come on top of Citi's increase in its overdraft fee to $34 per incident from $30 in May 2008. Bank spokeswoman Natalie Riper says the $34 fee is "in line with or better than industry standards."
Higher bank fees, says Joseph Ridout, a spokesman for Consumer Action, an advocacy group, are "part and parcel of what we've seen that the giant banks are trying to apply to cards."
For consumers like Neal Katz, 48, the fees make it less appealing to use their debit cards. As banks tack on all sorts of fees, it's become just as easy to go into debt with debit cards as with credit cards, he says.
"They charge us $35 per overdraft," says Katz, who lives outside Chicago. "So where is the advantage to debit cards?"