A swipe here, a swipe there can add up
Many unaware of overdraft charges for electronic bank transactions, groups find

By Richard Craver, Winston-Salem Journal

Thursday, June 16, 2005

Overdrawing a checking account in an electronic transaction carries the same penalty as bouncing a check, but most consumers are not aware that the same fees apply, two consumer-advocacy groups said in separate reports.

The groups - Consumer Federation of America and the Center for Responsible Lending - said that consumers can be assessed an overdraft fee of up to $34 a transaction using automated teller machines, automatic bill payments and purchases by debit cards.

The groups said that banks and credit unions are not as forthcoming as they could be in disclosing overdraft fees, particularly as more consumers rely on electronic transactions.

"Large banks are increasingly allowing consumers to unwittingly overdraw their accounts and then hit them with hidden fees," said Jean Ann Fox, the director of consumer protection for the Consumer Federation of America. The federation studied the overdraft policies for the nation's 33 largest banks.

Financial institutions defend what they call "courtesy" overdraft loans as protecting customers by minimizing or eliminating insufficient-fund fees that could be assessed by retailers or vendors.

"We fully disclose the overdraft process and fees to our clients, as well as they are published in our bank service agreement and pricing guides," said Bob Denham, a spokesman for BB&T Corp. Other institutions surveyed by the Winston-Salem Journal made similar disclosure statements.

Mark Fusaro, an assistant economics professor at East Carolina University, said that his research on bank-payment systems found that most consumers understand and accept overdraft fees on checks.

"But when it comes to electronic transactions, consumers appear to be much less pleased with the overdraft fees," Fusaro said. "They tend to ask, 'Why did you accept the transaction if you knew I didn't have the money in my account, and you didn't tell me I didn't have the money.'"

The groups said that many institutions are benefiting financially from their overdraft policies.

The Center for Responsible Lending said that consumers paid at least $10 billion in overdraft loan fees in 2004, based on data from the Federal Deposit Insurance Corp. and National Credit Union Association.

"Fee-based overdraft loan programs are not designed to help customers manage their finances," the center said in its report. "Instead, the programs are designed to increase the number of overdrafts and increase institutions' fee income."

Most institutions offer overdraft protection for a monthly fee of $5 to $10, which involves transferring money from a custo-mer's savings account, credit card, home-equity line or line of credit. Fox said that free-checking customers typically don't have other accounts and are more vulnerable to overdraft fees.

The federation said that the nation's 33 largest banks have increased their overdraft fees by 6 percent since 2002 to an average of $28.09. Meanwhile, several financial reports have found that the cost of processing a check ranges from 15 cents to 43 cents.

Financial officials said that the overdraft fees are high on purpose because they act as a deterrent against irresponsible account management. The institutions also can assess a second overdraft fee if they are not reimbursed for the first fee, typically within seven days.

"Clients may request that we not pay an item if their account would be overdrawn," Denham said. "There are various ways for clients to determine their account amounts."

Scott Silvestri, a spokesman for Wachovia Corp., said that consumers should not make financial transactions without knowing for sure there is money to cover the transaction.

The groups said that most consumers are not aware that state laws allow institutions to process checks or electronic transactions from largest to smallest, rather than in order received, within a two-day period. That processing format could lead to multiple overdrafts instead of one.

The groups said that the same technological advances enabling institutions to clear checks and electronic transactions faster should be applied to prevent most overdrafts from occurring.

"Consumers should be notified before completing an electronic transaction by either their institution or the merchant that it would overdraw their account and what the penalty would be if they proceed," Fox said. "That way, consumers could choose another payment option or not make the transaction."

Tony Plath, a finance professor at the University of North Carolina at Charlotte, said that it is likely the Truth in Lending Act will eventually cover courtesy overdraft programs. The act governs the disclosure of the cost of retail loans.

"Extending the act would require banks to acknowledge that courtesy overdraft programs really are a type of consumer loan transaction, and require banks to disclose the pricing and terms associated with this form of consumer lending," Plath said. "That regulatory change is long overdue."

• Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com