4A
NEWS
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OVERDRAFTS (CONTINUED FROM 1A)
THE UNIVERSITY DAILY KANSAN
THURSDAY DECEMBER 10, 2000
THURSDAY, DECEMBER 10, 2009
had tanked."
A checking overdraft occurs when people withdraw more money than they have in their checking accounts. Whether through a written check, a debit card transaction or an ATM withdrawal, most banks allow account holders to borrow money when funds run out. The bank funds the money and charges a fee for the service.
"If you're in the line at the grocery store and you don't have enough money in your account, this protection allows you to make the transaction," said Don Vecchiarelo, a spokesperson for Bank of America.
But this protection is often neither free nor optional.
Celle Wall, Greensboro, N.C., senior, had to pay more than $300 in fees after overdrawn her account 10 times her freshman year. During that winter break, her parents made her visit a local bank, where she had a three-hour conversation about financial responsibility with the manager. She hasn't drowned since.
Although the national average overdraft charge is $26, the average for the nation's "Wall Street" banks, those with assets greater than $50 billion, is closer to $36, according to Moebs Services, an Illinois-based economic research firm. Founder Mike Moebs said national banking chains have pushed the fees up during the past two decades to nearly $10 higher than credit unions and community banks. The fees are an important revenue generator for banks. In 2008, overdraft services pulled in $36.7 billion for American banks, up from $16.5 billion just 10 years earlier.
Erin Williams, Wichita junior, first experienced the pains of overdraft fees while using ATMs during a winter break trip to Colorado last year. On her vacation, she unknowingly made five overdrafts, costing her nearly $200 in fees.
Checking account holders across the country are calling for new governmental regulations to protect them from what they see as unfair and predatory policies.
CONTROVERSIES
Williams argued that her five-pack of overdrafts were the result of confusing ATM methods. She expected the ATM to warn her if she was taking out more than available. She was also confused by her ATM statement. Williams said the statement had a negative sign to the right of her dollar amount, which she ignored.
"I'd get my balance and it would portray it as a positive number," Williams said. "So I thought I'd have money in my account and make a withdrawal, only to put myself way further in the negative."
Her complaints are among thousands calling out for overdraft regulation. The complaints cover deceptive practices and both a lack of choices and information. Calls for overdraft regulations are being heard in federal courts, agencies, and both houses of Congress.
But many complaints center on a general lack of knowledge by account holders.
Scott Reid, Abilene, Texas, senior, was surprised when he discovered he owed $150 in overdraft fees to Commerce Bank. He was aware he could be charged for an overdraft, but he did not understand there would be no notification when his account hit zero.
"I just figured that my card would be rejected or I would be warned somehow," Reid said. "It was never really explained to me."
REORDERING
BANKS' DEFENSE
Despite angry customer allegations, both banks and financial experts contend that there are sound principles for the system that is in place.
Don Vecchiarello emphasized the word "protection" in the Bank of America's overdraft protection policies. He said the majority of customers who understand the
Barry Himmelstein, a lawyer with the California-based law firm Lieff Cabraser Heimann & Bernstein, is working on a series of class action lawsuitts that accuse the nation's largest banks of predatory overdraft policies. The firm is targeting the practice of withdrawal "reordering."
Reordering occurs when banks take a set of withdrawals and reorder them from largest to smallest, regardless of the order they were taken out. Himmelstein explained that if a person has $10 in his account, and makes four $2 transactions followed by a fifth $10 transaction, a bank would charge the $10 transaction first, so that the following four $2 transactions would each incur a fine.
"Rather than processing them in the order they are made, they will process the highest dollar amount before the lower dollar transactions, socking the person with the most overdraft charges possible," Himmelstein said. "These are predatory practices meant solely to screw the customer."
Moebs added that mostly Wall Street banks, and not smaller institutions practice reordering.
In response to complaints about transaction reordering, Moebs contended that most people are conflicted about whether or not they prefer the policy. He said that although people might not like their smaller transactions being ordered in a way that maximizes penalties, they also usually prefer to have their bigger, more important payments made first.
"The consumer doesn't always want the small items paid first," Moebs said. "They want their rent payments, their vehicle payments, their rent paid, always. That's the interesting thing going on here."
value of protection appreciate having it. Protection allows for account holders to avoid the embarrassment of being denied in a checkout line.
"I think the majority of customers who understand the policies appreciate the service." Vecchiarello said.
Robert DeYoung, professor of business, said when people complain about the current overdraft protection system, they fail to consider a world without it.
For example, when students use their debit cards on vending machines, the computer does not check their actual account to make sure funds are available. Instead, it takes a guarantee from their bank that the transaction will be fulfilled.
In a world without overdraft protection, this guarantee might not exist.
"Too many people probably take for granted what this service actually allows," DeYoung said.
Vecchiarello said that Bank of America had heard the calls for change and was working to heighten its focus on meeting customer needs.
In late October, Bank of America eliminated overdraft fees for withdrawals of less than $10 per day. The bank also no longer charges additional fees when a customer has more than four overdrafts in a day.
"We recognize that many of our customers are experiencing challenges with the
current economy, and we're committed to finding more ways for them to manage their finances," Vecchiarello said.
If Erin Williams attempts to overdraw on her bank account six months from now, she might be faced with a new bothersome reality — rejection.
Bryant Hadley, Wichita sophomore, overdrew five times within two days earlier this year, at a cost of nearly $180 in fees. Two McDonald's double cheeseburgers ended up costing him about $40.
CURRENT LEGISLATION
Recent regulations set by the Federal Reserve require banks to provide more information and options concerning overdraft protection.
On Nov. 12, the Federal Reserve ruled that banks would no longer be able to automatically enroll their customers in overdraft protection programs. Instead, customers will receive clear information about their options for overdraft protection and can choose whether they want to opt in. Banks must also send existing account holders notifications asking them if they want to opt in to an overdraft program. If they do not respond by July 1, they will be taken off the overdraft plan.
Howard Ting/KANSAT
Also, bills in both houses of Congress propose setting strict limits on the number of overdraft fees, their prices and the structure of their collection.
The bills, both titled the Overdraft Protection Act, would limit banks to charging a customer for only one overdraft per month, and a maximum of six per year. The
Lesley Parish of the Center for Responsible Lending said the bills would provide permanent necessary changes for checking account policies.
bills would also ensure that overdraft fees are set proportionally to the amount of an individual overdraft.
"Once the spotlight fades on these issues banks
will go back to their egregious practices",
Parish said. "We're hopeful that the current momentum will make sure these bills are supported."
Scott Reid keeps small amounts of money in his Commerce Bank checking account. He puts in his bi-weekly paycheck from his part-time landscaping job. He uses the small amount of money to pay for food, entertainment and other expenses. His second banking account is with his hometown bank in Texas. He uses that account to pay rent, utility bills, loans and other big payments.
WHAT COULD THIS ALL MEAN?
The system has only failed once, when he overdrew five times in less than three days from his Commerce account.
But in the future, Reid might face more fees for simply having a checking account.
ROBERT DeYOUNG Professor of business
"If you get rid of overdrafts, banks are going to charge the same people in new ways." DeYoung said. "Getting rid of overdraft fees will spread out the costs more
"If you get rid of overdrafts, banks are going to charge the same people in new ways."
among account holders, especially those with small balances"
"We don't complain when movie stores charge us late fees because we recognize the service they are providing," DeYoung said.
If the proposed overdraft legislation is passed by Congress, checking account holders will likely be subjected to new and increased monthly "maintenance" fees that will make up for revenue collected by overdraft fees. Experts say strict regulations could be detrimental for both banks and consumers for years to come.
Professor DeYoung said account holders such as Reid are unprofitable for banks unless they charge fees because the amount of money kept with the banks is too small to lend out. He said people who have problems with overdrafts should remember that banks are a business like any other.
Because overdraft fees are expected to generate $38 billion in bank income this year, substantial limits could mean billions in lost revenue.
Some figures suggest that banks are already adapting to potential changes. Checking account monthly maintenance fees increased by 15 percent in the first and third quarter of 2009, according to MoneyRates.com, a Web site that compiles banking statistics. These fees include monthly charges for direct deposits and minimum balance fees.
Mike Moebs added that the restriction of overdraft fee collection could be a frustrating dilemma. If customers opt-out, then hit their limit, or have banks that simply decide to stop allowing overdrafts, transactions will be rejected
"But with banks, people forget about the service they are providing. And this service isn't free."
and banks will either suspend or shut down customer accounts.
DeYoung added that the ability to make purchases with debit cards and checks might become far less universal than it is now. Most small transactions today occur without the business actually transacting with the account. For example, if a person swipes his or her debit card at McDonald's, the transaction is allowed because the bank guarantees the transaction. After the point of sale, the bank makes the full charge from the account later in the day.
If banks are no longer profiting from people who go into the red zone, they might discontinue this service.
"Those card swipes on vending machines might disappear," DeYoung said. "Banks will stop wanting to allow a risk where people can spend more money than they have."
WHAT SHOULD STUDENTS DO?
After her first semester freshman year, Celie Wall's parents brought her to their
BY THE NUMBERS;
$38.5 billion is the expected revenue from overdrafts for 2009.
+$1 billion in fees was paid by 18-to 24-year-olds in 2008.
46 percent of 18-to 24-year-olds overdraw at least once per year.
Sources: Center for Responsible Lending;
Moebs Services
$26 was the average overdraft fee in 2008.
"They basically sent me to a bank and had me sit down with them." Wall said. "What was supposed to be a 30-minute conversation ended up being a three-hour meeting about money management."
local bank in Greensboro, N.C., and sat her down with the manager. Her parents had closed down her accounts.
She has not overdrawn from her account since.
Today, Wall's skills are ahead of the curve. Moebs said that seven out of eight people who have checking accounts do not balance them. He said recent technology such as online statements were helping people, but most were unaware of how much money they had in their accounts.
Now she has three accounts: one for spending on "fun things", another for paying rent and bills, and a savings account. To keep track of her finances, she uses a check registry and a phone application that allows her to record payments and keep track of her balances at all times.
Most students live on tight budgets, often with small, paycheck-to-paycheck accounts like Reid's.
DeYoung said whatever happens with overdraft regulations, the best advice he could give for students is simple.
"Keep track of your money," DeYoung said. "If you don't, you can expect to get screwed, no matter what the laws are."
Edited by Liz Schubauer
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