Press of Atlantic City

Overdraft Bank Fees Fall Under Scrutiny

Press of Atlantic City — Saturday, October 24, 2009

By ERIK ORTIZ
Staff Writer

Customer after customer lined up at the register, swiping credit or debit cards into a card reader at the Wawa in Pleasantville on a recent afternoon.

Taleia Fisher, meanwhile, was withdrawing cash out of the convenience store's ATM. The 19-year-old Pleasantville resident has kept an eagle eye on her TD Bank checking account ever since she was unintentionally charged a $35 overdraft fee — the result of a computer glitch with the bank's system earlier this month. She used to be with Bank of America, but switched because she didn't like its ATM fees.

"All these fees are unnecessary," she said after using cash to pay for her items at Wawa. "It's messed up."

But for banks, the fees are a moneymaker. They raked in almost $24 billion in overdraft charges alone in 2008, according to a new report from the nonprofit Center for Responsible Lending in Durham, N.C. And such a financial windfall has not gone unnoticed by legislators, consumer advocacy groups and the Federal Reserve, which are pressuring banks to revise the ways they charge customers.

Some of the larger banks, such as Bank of America and PNC Bank, already have announced plans to overhaul their fees. Last week, Bank of America started capping how many overdraft fees it will charge customers per day to no more than four, down from 10, and it stopped charging overdraft fees to customers who overdrew their accounts by less than $10 per day.

In addition, customers now have the ability to opt out of the bank's overdraft service, meaning they will not be able to use their debit cards or checks on purchases that would put their balances in the negative — thus avoiding a fee.

PNC Bank on Friday began reducing its overdraft fees to no more than four per day, and beginning next June, it will eliminate overdraft fees for transactions of $5 or less, spokesman Fred Solomon said.

While those changes are a step in the right direction, banks have other ways to pinch profits, said Scott Bilker, a Barnegat Township financial adviser and founder of Debtsmart.com.

"It's a shell game," Bilker said of how banks charge customers. "If one fee's closed up, something else is going to open."

Cost of fees rising

Banks charge fees to maintain the services they offer and to keep branches operating.

Some fees are upfront and expected, such as charging interest on a loan. Others are less obvious: Losing your debit card may cost you a replacement fee. Many banks also charge a monthly service fee whenever the account holder dips below the required minimum balance.

Customers of national and regional banks pay among the highest fees. But the services they get in return — access to more ATMs, cutting-edge online and mobile banking technology — surpass what smaller community banks usually can offer.

What rankles some customers and consumer advocates when it comes to fees is how they are devised.

Overdraft fees are getting the most attention these days, and for good reason. More than 50 million Americans overdraw their checking accounts in a typical 12-month period, which allowed overdraft fee income for banks and credit unions to increase 35 percent from 2006 to 2008, the Center for Responsible Lending reports.

As a result, Americans collectively spent more money to pay for overdraft fees last year than on some consumer goods.

"Overdraft fees eat into the already strained budgets of working families, with Americans now spending far more on overdraft fees annually than they do on common household items such as books, cereal or postage stamps," the report states.

The overdraft fee is essentially a form of short-term credit. No matter how much the transaction is worth that puts the customer in a negative balance, the fee to cover the transaction is standard. Banks that force customers into such an overdraft arrangement say it shields them from the embarrassment of having insufficient funds. It also protects them from possible bad-check fees or late fees.

The arrangement, however, is questionable when considering the way banks order which checks and debit transactions get cleared first.

If a customer has several transactions on a particular day, ranging from a mortgage payment of $2,500 to a cup of coffee costing $1, many banks will choose to clear the mortgage check first, claiming their customers would prefer to have the larger expense paid as opposed to something less costly.

Other banks may clear transactions based on the order the customer made them or by check number.

Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a watchdog coalition, said banks that choose to go from highest to lowest can pile overdraft fees onto their customers. That happens when the $2,500 mortgage payment puts a person's account below zero — triggering an overdraft fee — and then each smaller transaction after it continues to put the person further into negative territory — adding recurring overdraft fees each time.

Especially bothersome can be getting charged a $30 overdraft fee on a transaction that cost as little as a $1 cup of coffee, Salowe-Kaye said.

"Consumers need to know how they're being charged," she said. "It has to be clear and transparent. Banks are going to make money, sure. But we think that the charges are exorbitant. And the way they're charging is predatory."

Some of the smaller banks in southern New Jersey say that while fees are part of the cost of doing business, they are not enforced simply to fleece customers.

Denise Zemanik, assistant vice president and main office manager of Vineland-based Capital Bank of New Jersey, said the first time a customer overdraws, the bank will waive the overdraft fee.

Added Capital Bank CEO David Hanrahan: "We're small and nimble and responsive enough that if the customer is overdrawn, we'll call and engage with them. We have a business to run, but we also want our customers to love us."

Fee policies scrutinized

The Federal Reserve is expected to set new rules by the end of the year that would require banks to allow customers to opt out of overdraft coverage.

According to a survey released in 2008 by the Federal Deposit Insurance Corp., about 75 percent of banks automatically enroll customers into an overdraft program, although customers are usually allowed to not participate. Nearly 25 percent of those banks also imposed additional fees or interest on customers whose account balances remained negative.

The Obama administration favors the creation of a Consumer Financial Protection Agency that would be able to regulate the banking industry and credit cards and other fees that affect consumers. The agency's oversight would include only the nation's largest banks and lenders, and not the more than 8,000 community banks and credit unions that have been less troubled in the wake of the subprime housing crisis.

The creation of an agency has been opposed by Republican lawmakers, banking lobbyists and the U.S. Chamber of Commerce, which see it as further government intrusion that will limit consumers' access to credit in an already weak economy.

But some members of Congress want to see more done.

Rep. Carolyn Maloney, D-N.Y., has a bill that would not only give customers the option to choose to have overdraft coverage but also require banks to warn customers when their accounts are nearing zero and to clear debit transactions and checks chronologically, instead of from highest to lowest.

Sen. Chris Dodd, D-Conn., introduced his own bill last week that would go further by capping how many fees a bank could charge per month.

Earlier this year, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, which aims to cut down on high interest rates and other fees to consumers.

Among the law's supporters is New Jersey's U.S. Rep. John Adler, D-3rd, a member of the House Financial Services Committee, which approved a measure Thursday creating the Consumer Financial Protection Agency.

"Big banks and credit card companies cannot be permitted to take advantage of hard-working New Jersey families and businesses in order to make a profit," Adler said. "Enough is enough. Our local families and businesses are the backbone of any economic recovery, and we need to ensure they are being treated fairly and are in control of their credit."

'Banking you can trust'

Salowe-Kaye, of New Jersey Citizen Action, said it is important for consumers to be financially literate and responsible enough to manage their checkbooks.

Banks such as PNC offer customers online tools to help them do just that. Last year, the Pittsburgh-based bank launched its "Virtual Wallet" Web site, which encourages users to save money and also alerts them to "danger days" — when their account balance could fall below zero because a bill needs to be paid.

Credit unions also have stepped up their recruiting efforts as an alternative to banks, and the statewide trade organization has started a campaign called "New Jersey Credit Unions: Banking you can trust."

Paul Gentile, president and CEO of the New Jersey Credit Union League, said unlike banks that make a profit to please their shareholders and investors, credit unions can offer lower fees and better rates because they are controlled by their members.

Gentile questioned why banks would have to charge higher fees to pay for services and operations.

"I would argue that many of the banks have the opportunity to raise capital at the drop of a hat," Gentile said. "They can build a branch, raising millions of dollars very fast."

Brad Strouse, 43, of Estell Manor, has been faithful to Sun National Bank in Vineland. He said it was disappointing to see the federal government use billions of dollars of taxpayer money to bail out some banks, which continue to make money from customer fees.

But he stays on top of his money by checking his account weekly. So far, he said, he has been responsible in his banking.

"I do hear about all these fees from my friends, and it just appalls me," said Strouse, a senior electronic technician at a casino in Atlantic City. "It'd be better if the banks can just work with customers and not against them."

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Common fees and how to avoid them

Bank fees are ubiquitous and can build up quickly if customers fail to keep their accounts in check. Here are some of the more common fees and ways to fend them off:

Overdraft

What it is: When you do not have enough money in your checking account and have a check or debit card transaction that needs to be cleared, your bank or credit union will step in and cover it. If you continue to rack up transactions and fail to notice your account is below zero, the bank will still keep covering your purchases. But each time it does, it assesses an overdraft fee. Banks often automatically enroll customers in such a service as a courtesy.

How to avoid: Maybe you do not mind the fact that your bank has got you covered. Banks say they offer the service to spare customers the embarrassment of being denied a transaction or bouncing a check. But to avoid the fee, make sure to keep track of how much is in your account so that you do not fall below zero. If you do go into negative territory, some banks may be lenient and waive the initial overdraft fee. If you have more than one, they may not be so accommodating.

Otherwise, you can always ask to opt out of overdraft services altogether. You also may want to see if your bank will extend to you a line of credit, which typically comes with an annual fee. Some banks also link savings accounts with checking accounts so that you can tap money from your savings when your balance is low. A fee may still be involved of about $5 to $10 per transfer, but is still much lower than a $20 to $30 overdraft fee.

ATM

What it is: Everyone knows when you use an ATM of another bank, you will be assessed a fee — about $3 — just for using it. But some banks also charge their own customers for using that "foreign" ATM.

How to avoid: The simplest way would be to use only your bank's ATM, but that's not always possible. Some community banks will reimburse you when you use an outside ATM, but only for a certain number of times per month. To save a few bucks from the other bank, you can take money out of any Wawa ATM. The convenience stores house PNC Bank ATMs and do not charge user fees to non-PNC customers.

Minimum balance

What it is: Some banks require that you keep a minimum balance in your account. If you fail to do so, you will be charged a "service" fee every month that your balance dips below the minimum.

How to avoid: As long as you have enough money in your account, you will not be charged. Some banks also charge no service fee as long as you have direct deposit in your checking account. One alternative might be an account at a credit union. Unlike banks, they do not typically have the fee because they do not require a minimum balance.

Point-of-sale

What it is: When paying for a purchase, debit cards allow you to sign as if it were a credit card, or simply enter a PIN. If you do the latter, some banks — although practically none of the bigger ones — charge a fee of 25 cents to 50 cents per purchase, or about $1 to $2 per month.

How to avoid: Ask your bank whether it has such a fee, and if it does, use the "credit" option when buying. An extra incentive for doing that: If your account number gets stolen, some banks will not cover an unauthorized debit transaction.

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