Hate Overdraft Fees? You’re Not Alone …

Excerpted from WSJ, “Consumers Vent on Overdraft Fees” By Kelly Evans, Mar 26, 2009

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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

Overdraft fees usually work like this: A customer makes a purchase … 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 [the consumer] isn’t aware that his account is negative — or that he has incurred a $35 overdraft fee — until he checks his balance online …

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 …

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 … shows banks and credit unions earned $36.7 billion in consumer overdraft revenue last year, about three-quarters of their total service charge income

People … 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 … 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 … 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 …

[However] 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 TCF Bank … it could mean the end of free checking … “Then everyone will end up paying for it.”

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