Sunday, April 05, 2009

$38 for a cup of coffee? Use debit card wisely

Would you pay $38 for a cup of coffee? Clifford Phillips of Spokane, Wash., did. He used his debit card to pay for a latte, not knowing there wasn’t enough money in his checking account to cover it. The bank could have declined the transaction for insufficient funds. Instead it approved the electronic payment and dinged his account with a $34 overdraft fee.

At most banks and some credit unions, most checking accounts are now automatically enrolled – as a customer service – in an overdraft protection program. The financial institution lets you spend more than you have, loans you the difference (up to a certain amount) and hits you with a hefty fee.

Phillips didn’t know his account had this overdraft feature and doesn’t want it. He tells me he prefers “the embarrassment of having the transaction denied” to being socked with a $34 fee. But the bank won’t let him cancel.

“That’s not customer service, that’s exploitation,” he says. “I should have the right to say I don’t want it.”

Consumer groups hate these automatic bounce protection programs. They refer to them as overdraft loan programs because that’s what’s really going on here. The banks are giving you a short-term loan to cover the overdraft at a sky-high interest rate.

“The big banks are making a ton of money on this, so are some credit unions,” says Ed Mierzwinksi, consumer program director at U.S. PIRG. “This overpriced rip-off service makes no sense to anyone but the banks.”

Jean Ann Fox, director of consumer protection at the Consumer Federation of America, just laughed when I told her bankers call automatic overdraft protection a “customer service.” She says banks are “taking advantage of customers” by letting them overdraw and then slapping them with “gotcha fees” for each overdraft that’s allowed.

The banking industry sees it differently. Nessa Feddis with the American Bankers Association tells me customers appreciate the service “because they want their bills paid” and she insists most banks allow customers to opt-out. The ABA also points out that these fees are avoidable. “If people don’t want to pay these overdraft charges they can keep track of their transactions,” Feddis says.

The Fed considers new rules
The Federal Reserve Board has proposed rules for how banks should handle their overdraft service for ATM withdrawals and debit card transactions. There are two options on the table: opt-in and opt-out.

Opt-in would truly reform bank practices. It would require them to get your permission in writing before you could be enrolled in the overdraft program. Opt-out keeps things the way they are. Banks could continue to sign up customers without their express consent, but they would be required to let anyone opt-out if they didn’t want the costly protection.

It’s no surprise the banking industry supports the opt-out proposal while consumer groups want the rule that requires customers to opt-in. The American Bankers Association says not only is automatic enrollment better for people; it’s what people want. “Customers have demonstrated this is their overwhelming preference” says the ABA’s Feddis.

Consumers Union claims it’s just the opposite. In a letter to the Fed, it cites a poll by Consumer Reports National Research Center. The poll found “an overwhelming number of consumers want a real choice when it comes to overdraft programs.” Two-thirds said they prefer to expressly authorize overdraft coverage.

The survey found many people do not understand how automatic overdraft programs work. Consumer Reports found that 39 percent of the people thought their bank would either deny a debit transaction or allow it to process without charging a fee if it would overdraw the account. Nearly half of those polled (48 percent) thought their ATM card would not work if they tried to withdraw more money than was in their account.

“If banks believe the overdraft programs are truly beneficial, then they should be required to persuade their customers to sign up before they can charge them such high fees,” writes Consumers Union lawyer Zeichner Bowne.

Congress tackles overdraft fees
Last week Congresswoman Carolyn Maloney (D-NY), a senior member of the House Financial Services Committee, introduced the Consumer Overdraft Protection Fair Practices Act. This bill (H.R. 1465) would require banks to give customers a warning that their withdrawal from an ATM or purchase with a debit card is about to trigger an overdraft. The customer would then have the option to stop the transaction or accept the overdraft service and the associated fee.


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