Overspending on Debit Cards Is a Boon for Banks
When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.
So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks and a $34 fee. He got the $6.50 student discount at the movie theater but no discount on the $34 fee. He paid $6.76 at Lowe's for screws and yet another $34 fee. All told, he owed $238 in extra charges for just a day's worth of activity.
Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.
Banks and credit unions have long pitched debit cards as a convenient and prudent way to buy. But a growing number are now allowing consumers to exceed their balances for a price.
Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer's balance.
In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.
But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer's transactions in a way that causes more of them to incur overdraft fees.
"Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card," said Eric Halperin, director of the Washington office of the Center for Responsible Lending.
Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation's largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.
Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year's end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.
The Federal Reserve is considering requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers like Mr. Means are not caught unaware at the cash register.
Representative Carolyn Maloney, Democrat of New York, would go even further by requiring warnings when a debit card purchase will overdraw an account and by barring banks from running the most expensive purchases through accounts first.
The proposals carry considerable momentum given the popularity of credit card legislation signed into law in May. They also have a certain inevitable logic, since the credit card legislation requires a similar "opt in" decision from consumers who want to spend more than their credit limits and pay the corresponding over-the-limit fees. Overdrafts are simply the reverse, where the limit is zero, and the bank charges a fee for going under it.
But with so much at stake, the banking industry is intent on holding its ground.
Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.
"Everyone should know how much they have in their account and manage their funds well to avoid those fees," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.
Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.
Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney's legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation's banks and credit unions collect more from overdraft services than they make in profits, he said.
"Will they be able to replace it with another fee?" Mr. Moebs said. "Not immediately and not soon enough."
They will certainly try. For instance, some banks have said they might slap a monthly fee of between $10 to $20 on every free checking account. At the moment, people who pay overdraft fees help subsidize the free accounts of those who do not.
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