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Reforms Fail to Halt Bank Revenue on Debit-Card Overdraft Fees

Financial reforms regulating consumer fees haven’t stopped U.S. banks from collecting billions of dollars for covering overdrafts on debit cards.

While fee revenue will be down about 16 percent this year from its peak in 2009, it will top $16 billion, according to banking consultant Moebs Services, Bloomberg Businessweek reports in its Oct. 24 issue.

“Consumers are still getting hit really hard by overdraft fees,” said Rebecca Borne, an attorney at the Center for Responsible Lending, a consumer advocacy group.

As banks pushed a shift from paper checks to debit cards over the past decade, they began automatically enrolling customers in overdraft protection plans, with charges of as much as $35 for each overdrawn transaction.

That lets the 185 million Americans with debit cards make emergency purchases even if their account is short, banks said. Consumers soon discovered that a slice of pizza could cost almost $40 after overdraft fees are assessed. Last year the Federal Reserve barred banks from offering overdraft protection on debit-card transactions without prior consent from consumers.

A few banks, including Bank of America Corp. and HSBC Holdings Plc, have since stopped offering overdraft protection on debit-card purchases. BofA in September announced a $5 monthly charge for debit cards to make up for lost fee revenue. Others introduced or expanded overdraft programs. An informal survey by Impact Financial Services, which advises small and midsize banks, polled 150 community banks and found that 70 percent of them now offer overdraft protection, compared with about half before the rules took effect.

Marketing Campaigns

Many banks that offer the services have started aggressive marketing campaigns to get customers to enroll. The banks sent letters and e-mails explaining the changes, at times with warnings that if consumers didn’t sign up their card might be rejected when they most need it. Some banks called customers who’d had transactions denied to persuade them to opt in.

“We were surprised at the success rate,” said Jefferson Harralson, a bank analyst at research firm Keefe, Bruyette & Woods Inc.

The marketing campaigns also confused customers. A survey by the Center for Responsible Lending showed that 60 percent of consumers who chose overdraft protection did so in part to avoid penalties if their debit cards were denied, even though such fees don’t exist. Similarly, two-thirds said they signed up to sidestep charges for bounced checks, which are covered under different programs.

Reordering Purchases

Many banks still engage in one highly criticized overdraft practice: reordering purchases to process the largest ones first, instead of in chronological order. That means a big purchase may be approved, and customers could face overdraft charges for several small transactions. Banks that do this said consumers prefer the reordering because larger transactions are often the most important.

U.S. District Judge William Alsup in California ruled last year against Wells Fargo & Co. in a class action lawsuit about the practice, calling it “utterly speculative.” Alsup ordered the bank to pay consumers $203 million for what he called the “bone-crushing multiplication of additional overdraft penalties.” Wells Fargo said it’s appealing the ruling, and it now processes transactions in the order they happened.

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