Lenders defend policies, but some profit mightily from customer woes
Jake Despot gets on a roll using his debit card, and before he knows it he has withdrawn more from his checking account than is really there.
The financial punishment? A "killer" overdraft fee charged by his bank.
It's outrageous. I get dinged a smooth $30," said the 24-year-old product support technician for Braun Corp. in Winamac.
Banks nationwide are increasing their overdraft charges at a time critics say is most difficult for customers, given the recession.
Banks say the fees are a way to cover the costs they incur -- such as the manual labor required to wade through the accounts -- as more and more customers become overdrawn.
The national median overdraft fee rose by a dollar from $25 to $26 in 2008, according to research company Moebs Services, which surveyed more than 2,014 banks nationwide in June. It's the first time banks have ever raised fees in a recession, Moebs says.
With the increases, U.S. banks are poised to make a record $38.5 billion in overdraft fees this year, nearly double the $19.9 billion collected in 2000, according to Moebs.
At Indianapolis' 10 largest banks, according to market share and deposits, overdraft fees range from $23 to $37.50.
Huntington, No. 4 in the Indianapolis market, charges $23 the first time a customer makes an overdraft error and $37.50 each time after. It's been more than a year since Huntington has increased its fees, but the bank does re-evaluate those charges every year or two to try to find a fair charge, said Mike Newbold, president of Huntington Bank for Indiana.
"When we look at fees, we try to balance that out for the cost-benefit equation for both the bank and the client," said Mike Newbold.
He said the first step at any of his banks is to educate customers on ways to avoid the fees, such as allowing funds for an checking overdraft to come from a related savings account or credit card.
Newbold also said paying the bank's overdraft fee allows customers to avoid a higher or double charge for a returned check.
"Clearly it's not good business, nor do we want to be in the position of taking advantage of the client," Newbold said. "And we don't. Clearly where we can save the client a little bit, we want to do that."
Nationally, overdraft fees range from $10 to $38. And while those charging the lower end of the scale are most likely covering their direct costs related to the overdraft, the higher charges are a moneymaker, said Kenneth A. Carow, associate professor of finance at Indiana University's Kelley School of Business.
"Those fees on the upper end are making a profit from the transaction," he said.
The heated issue of overdraft fees recently has reached government leaders. The Federal Reserve and other lawmakers are discussing rules about such fees, and some leading banks are willing to make concessions.
For example, JPMorgan Chase, the leading bank in the Indianapolis market, has not raised overdraft fees in at least two years, said spokesman Tom Kelly. Instead, Chase charges overdraft fees that increase with each overdrawn transaction, ranging from $25 to $35. A Bank of America spokeswoman also said the bank decided not to raise the $35 fee. Capital One and Citigroup are considering following suit as well.
Kelly said the overdraft charges are a learning experience for customers.
Perhaps after that first $25 charge, a client will step back and make changes to make sure it doesn't happen again, he said.
At Heartland Community Bank, which operates six branches in Johnson County, the overdraft fee is $31 per item.
"The majority of that $31 is offsetting that expense involved in the backroom," said Chief Executive Officer Steve Bechman. "Someone still has to manually look at that item -- whether it gets paid or returned. There is some time involved in that."
Heartland, unlike many banks, has actually seen a decrease in overdraft income.
"We discussed it among ourselves, and we think people are being more careful because they don't want to incur the overdraft charges," he said. "People are just doing a little better job of planning."
For those who don't, Heartland offers an "overdraft privilege" program.
The bank will cover up to $500 per personal account. It's protection, not a loan.
"If they make a mistake or are running tight around payroll time, it helps," he said.
Customers still are charged the $31 fee, but the bank doesn't return the check.
Facts about overdraft fees
44.5 percent of all banks and credit unions have overdraft income greater than net income.
Higher overdraft fees were led by Wall Street banks, with assets greater than $50 billion, charging $35 per overdraft.
Wall Street banks' overdraft fees are 78.5 percent of what a payday lender would charge.
85.9 percent of all depositories offering overdraft protection allow the consumer to opt out at any time.
This is the first time overdraft fees have increased in a recession.
Ways to avoid overdraft fees
Monitor your accounts closely. With online banking, you can know up-to-the-minute how much is in your account.
Link your checking account to a savings account you have with the bank. If you overdraw your checking account, the bank can transfer funds from your savings account to your checking account. Many banks still charge what is called a transfer fee, but it's typically between $5 and $10.
Set up an overdraft line of credit with the bank. You need to apply for a "line of credit" just as you would apply for a regular loan. If you overdraw your account, the bank will lend you the funds by using your line of credit. You will pay interest on this loan, and there may be an annual fee. But the overall costs may be less than the costs for courtesy overdraft-protection plans.
Link your account to a credit card you have with the bank. If you link your account to a credit card, any overdraft amount becomes a cash advance on your credit card. You will probably incur fee and interest charges that will vary.