Before you swipe your debit card again, you might want to think twice. Overdraft fees have become a huge profit center for consumer banks. How big? Even though banks make only about 5 percent of their total revenue from checking accounts, last year they raked in $32 billion in overdraft fees.
Critics have some serious concerns about overdraft protection, which allows a bank customer to continue withdrawing money from a checking account even if there are no funds left in it. In fact, the Consumer Financial Protection Bureau (CFPB) says overdraft protection can cause the kind of harm that federal consumer-protection laws are designed to prevent. The Pew Charitable Trusts maintains that overdraft protection has the potential to impose hidden, unnecessary and potentially dangerous risks to consumers.
Jacqueline Forde, a mother of two from Brooklyn, N.Y., learned the hard way about the potential dangers of swiping her debit card. “Some months,” she said, “I would have $250 to $300 in overdraft fees for that month alone.” After she paid the overdraft fees, “there really wasn’t enough to even pay the rent.”
Forde is not alone. According to the most recent study by the CFPB, Americans continue to rack up overdraft fees, with about 27 percent of all consumer accounts experiencing at least one such fee in 2011. Since mid-2010, federal regulators have required consumers to opt in to overdraft protection for their checking accounts. The feds did that because of worries they had back then about the growth in the fees banks charge for the service, and because of heavy overdraft use by many consumers.
The American Bankers Association said overdraft protection is a “service customers freely elect to have, and it provides peace of mind to know your payments will be covered.” But critics contend that it’s more like a loan with a sky-high interest rate. Susan Weinstock from Pew said that “according to the FDIC, the typical size of an overdraft is $36. If you then apply the $35 overdraft fee, which is the typical size of the fee that goes on top of that overdraft, and if you spread that out for a year, it would be about 5,000 percent interest. That’s excessive.”
Moreover, many consumers don’t even know they’ve opted in for overdraft protection because the information is often buried in lengthy disclosure agreements. “The form is not very clear,” said Weinstock, “so when you’re opening a new account, the banker is handing you pieces of paper. If you just sign away, you’ve just opted in to the most expensive form of overdraft, which is $35 every time you overdraft. And it can really add up.”
Indeed, in a recent survey by Pew, 54 percent of overdrafters said they did not believe they had opted in to coverage, and 75 percent said they would rather have a transaction declined.
But even more disturbing to critics is how some banks calculate overdraft fees. Consumers might think banks routinely process their checking account transactions in chronological order. However, many banks engage in a practice called “transaction reordering,” in which a customer’s transactions are arranged from the highest to lowest amounts, regardless of which transaction came first. With this method, the account balance is drained more quickly, triggering even more overdraft fees.
Al Jazeera America asked several banks to tell us why they reorder from highest to lowest. Most didn’t respond. But one bank, PNC, did defer to the American Bankers Association, which said that, “for some customers, paying the largest transactions first is important because it ensures that payments like mortgage, rent or credit card bills will be paid.”
Nonetheless, many big financial institutions have been sued for unfair and fraudulent business practices because of this method of “high to low” transaction reordering — and to date at least 14 banks, including Bank of America and JPMorgan Chase, have settled for more than $800 million. The trial judge in one lawsuit went so far as to say that “the only motives behind the challenged practices were gouging and profiteering,” and that high-to-low transaction reordering is a “trap that would escalate a single overdraft into as many as 10 through the gimmick of processing in descending order.”
However, none of the banks has admitted to any wrongdoing. Wells Fargo opted not to settle and told Al Jazeera, “We don’t believe that the judge’s ruling was in line with the facts of this case or the law, and we have filed an appeal.”
“Banks are allowed to reorder transactions from high to low and maximize overdraft fees,” said Weinstock. “There are no rules that say that they can’t. A lot of the banks have stopped doing this because of litigation. But, in their disclosure agreements, they all say, ‘We reserve the right to change the terms and conditions of this account at any time.’ So, while they’ve stopped doing it now, they could start doing it again at a later date.”
In fact, Pew studied 50 of the nation’s largest banks and found that, as of May 2013, many of those banks were still actively engaged in high-to-low reordering, including Capital One, SunTrust and TD Bank. Capital One and TD did not respond to a written request from Al Jazeera, but SunTrust did confirm that it still processes transactions from the highest to lowest amounts, adding, however, that it doesn’t charge overdraft fees “for any items below $5.”
Rep. Carolyn Maloney, D-N.Y., wants to make banks more accountable and is co-sponsoring a bill that would require more transparency from banks and regulate the overdraft fees they charge.
“Well, right now, without the legislation,” said Maloney, “financial institutions can engage in transaction reordering to their benefit, forcing overdrafts and other deceptive practices that are very costly to consumers. So the legislation is needed to put the force of law behind it.”
However, the bill, despite having 45 co-sponsors, is likely to remain in committee for the time being. Furthermore, the American Bankers Association said in a written statement to Al Jazeera, “We oppose this legislation, which would harm banks and limit consumer choice.”
Maloney disagrees. “What I’ve seen is, oftentimes a consumer will make three, four, five, six small purchases and end up with $300, $400, $500 in overdraft fees. This is unfair. Then they are trapped with interest rates that they have to pay off, that keeps them in a cycle of poverty,” she said.
It’s a lesson Jacqueline Forde has learned all too well. “I’ve had it with these overdraft fees,” she said. “I closed that account. I said, you know, this is enough. I decided to get a bank that is safer, that doesn’t do these type of tricks.”
For now, the CFPB recommends tracking balances carefully and linking checking and savings accounts instead of opting in to costly, and potentially dangerous, overdraft protection plans that could keep consumers on an endless treadmill of high-cost credit.
With some reporting from Rima Abdelkader