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Friday, June 8, 2012

Bank Customers Lost Nearly $30 Billion To Overdraft Fees Last Year





Reading over a recent Pew Research Center report, I was reminded of a funny stand-up bit from comedian Louis CK in which he lamented being broke (this was, of course, before he hit it big with his sitcom Louis and reportedly grossed over $1 million with his latest self-released stand-up special). The bit, which you can watch here if you don’t mind some salty language, includes this great sequence:

Did you ever get so broke that the bank starts charging you money for not having enough money? The bank called me up and said, “We’re calling you because you don’t have enough money.”

I’m like, “I know.”

She’s like, “Sir, you have insufficient funds.”

“Well that’s a good way to put it too. I agree with that. I find my funds to be grossly insufficient. Thanks for calling. Why are you mad at me? How is this something I’m doing to you?”

She says, “Sir, you only have $20. That’s not enough. You can’t only have $20.”

I’m like, “Look. I’m not being broke just to [mess] with you. I just really don’t have any money. I’m not trying to be a [jerk].”

So they charged me. They charged me $15. That’s how much it costs to only have $20. But here’s the [messed] up part – now I only have $5! What did I pay the $15 for if I don’t get to have the $20 that I paid to have? I paid the money, where’s my $20? That’s like going to the movies, buying a ticket, and then they say, “Get out of here. Go home!” “I paid for the movie.” “No, you paid for a ticket!”

Turns out lots of Americans are paying for tickets but not watching the movie. According to Pew’s report, titled “Still Risky: An Update On The Safety And Transparency Of Checking Accounts,” Americans incurred $29.5 billion dollars in overdraft fees at the nation’s 12 largest banks and credit unions in 2011. That’s nearly $100 for every U.S. citizen, charged for overdrafting a checking account.

Overdraft fees, for those lucky enough to have never encountered them, occur when a bank withdrawal leaves a customer’s account below a pre-determined level. For some accounts, customers can draw the funds all the way down to zero and only incur a fee when the balance goes negative. Other accounts come with minimum balance requirements, forcing customers to keep at least, say, $500 or $1000 in the checking account at all times.

99% of the 237 unique checking accounts studied charged an overdraft fee of some kind, with the median penalty fee costing a customer $35. You might not know that, though. As the Pew study points out, the median length of a checking account disclosure statement – the fine print that most customers gloss over en route to opening their account – is a whopping 69 pages. That length is down from the 111-page average in 2010, but it’s still not exactly light reading. Take this Bank of America disclosure, for example; at 37,000+ words, it’s about 8,000 words longer than Steinbeck’s Of Mice And Men.

Buried within that disclosure, keen-eyed customers will find some nifty verbiage that allows banks to maximize their overdraft fee profits. For example, as of October 2011, “all 12 banks either reordered withdrawals from highest to lowest dollar amount or reserved the right to do so.” What does that mean? If you have $100 in your account and you buy a coffee, a cheap meal and a television set on your debit card, in that order, you could actually end up paying three separate overdraft fees. The bank withdraws the largest purchase first, placing you in the red. Every subsequent purchase (based on size, not on chronology) incurs an additional fee. Of the dozen banks studied, eight do this re-ordering by default.

So what’s to be done? Well, for one, Pew would like to see more transparency in the disclosure process. Even if consumer will still be charged fees, the idea is, those fees shouldn’t be hidden in dense, jargon-filled documents. Pew proposes a “simple, concise disclosure box,” akin to the now prevalent “Schumer Box” mandated for credit card companies.

Additionally, Pew recommends that overdraft fee structures be regulated, pricing information be provided in a clear manner to customers and banks be held accountable for re-ordering practices.

Some signs point to Pew’s push working. As previously stated, banks trimmed disclosure statements by over 50 pages between 2010 and 2011. Similarly, overdraft fees are down from all-time highs in 2009, when they cost bank customers $37.1 billion. But customers still need to be careful, lest they find themselves in the red, paying fees and quoting Louis CK: “You look in your bank account: Negative $10. That means I don’t even have no money now. I wish I didn’t have anything, but I have less than that. I gotta raise 10 bucks to be broke!”

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