Banks have spent much of the past year howling about revenue lost after financial reforms limited consumer fees, especially the billions they reaped from charges for covering overdrafts on debit cards. Those programs, though, remain highly profitable. While fee revenue will be down about 16 percent this year from its peak in 2009, it will top $16 billion, predicts Moebs Services, a banking consultancy. “Consumers are still getting hit really hard by overdraft fees,” says Rebecca Borné, 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 enrolling customers automatically in overdraft protection plans, with charges of as much as $35 for each overdrawn transaction. Banks say that lets the 185 million Americans with debit cards make emergency purchases even if their account is short. Consumers, though, soon discovered that a slice of pizza could cost almost $40 after overdraft fees. 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 and HSBC, 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, up from about half before the rules went into effect.
Many banks that offer the services have launched aggressive marketing campaigns to get customers to sign up. The banks sent letters and e-mails explaining the changes, at times with alarmist warnings that if they 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,” says Jefferson Harralson, a bank analyst at research firm Keefe, Bruyette & Woods.
The marketing campaigns also succeeded in sowing confusion. 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 actually are covered under different programs.
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, but customers could face overdraft charges for several small transactions. Banks that do this say consumers prefer the reordering because larger transactions are often the most important. A federal judge in California shot down that logic last year in a class action against Wells Fargo, calling it “utterly speculative.” He ordered the bank to pay consumers $203 million for what he called the “bone-crushing multiplication of additional overdraft penalties.” Wells Fargo says it is appealing the ruling, and it now processes transactions in the order they happened.