The Fight Over Overdraft Fees

Banks recently made huge profits from overdraft fees. Now the Consumer Financial Protection Bureau asks how much of that was bad money management by customers, and how much was banks gaming the system. Host Michel Martin talks with Washington Post Financial Reporter Ylan Mui and regular financial contributor Alvin Hall.

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MICHEL MARTIN, HOST:

And now to matters of personal finance. Last year, banks pulled in billions of dollars in overdraft fees from customers and the people who bear the brunt of those costs make up only a small percentage of banking customers, that according to a study from the FDIC. They also tend to be lower-income and younger customers.

Overdraft fees, in general, have faced increased scrutiny in the last few years. In 2010, banks were forced to make some significant changes, but despite the new regulations, banks are still able to make sizable profits from these fees and now the newly established Consumer Financial Protection Bureau says it is going to look into the way banks time the charges against customers' accounts. Consumer watchdogs have raised questions about whether financial institutions time the charges in a certain way to maximize fees.

We wanted to talk more about this, so we've called upon financial reporter Ylan Mui from The Washington Post. She's been covering this story. Also with us, one of our regular contributors on matters of personal finance and the economy, one of our money coaches, Alvin Hall.

Welcome back to you both. Thank you for joining us.

ALVIN HALL, BYLINE: Very glad to be here.

YLAN MUI: Thanks for having me.

MARTIN: Ylan, let me start with you. How much money exactly are banks, in general, making from overdraft fees?

MUI: Well, they're certainly making a lot of money, still, but it's down from before the new regulations took place, so in 2009, according to the Consumer Bankers Association, banks pulled in about $37 billion in overdraft fees. Last year, that number was down to about 29 billion. So you can see that there is a drop, but that it's still an area that is a significant source of revenue for them.

MARTIN: Now, the initial regulations spoke to the fact that banks were imposing overdraft fees without asking you in advance whether you wanted this service. This is, of course, if you overdrew your account. The regulation then said they have to ask you first if you want that service.

What is this new concern about? About timing of the charges? Can you explain that for us, Ylan?

MUI: Sure. What the Consumer Financial Protection Bureau is going to be looking into is the way that banks order your transactions. So oftentimes, a lot of customers think that, if I go to Starbucks and then I go to a furniture store and make a purchase and then I go grab some lunch and make a purchase, that the bank will deduct my account chronologically. Starbucks, furniture store and then the lunch place.

However, some banks are sort of switching that around and changing the order of the deductions so that the largest deduction comes first. So they might deduct it - furniture store, Starbucks, then lunch. And that's important because, if you have a limited amount of money in your account, it can increase the amount of overdraft fees you end up being stuck with.

So there was a very prominent case against Wells Fargo in which a woman, because of bank reordering of her transactions, instead of paying $22 in overdraft fees, she ended up paying $88 in overdraft fees. So there can be a really significant difference in the penalties you receive, depending on how the banks process the transactions.

MARTIN: Alvin, I want to turn to you. We heard from this one report that the people who are more likely to pay these fees are described as low-income earners and younger people. And why do you think that is? And I do want to be mindful of the fact that some people will be listening to our conversation and find the whole thing ridiculous, being - the argument being you should know how much is in your account. Hello?

HALL: That's logical. I mean, when you're financially responsible, you should know that. But I think, when you're low-income, you are always living with your butt back up against the wall. And so all it takes is one thing, i.e., your child gets sick and you don't have the money for the medicine or you need to pay the rent or your kid needs something for school.

People often think that people overdraft their account because they're buying something they want, but it's generally an emergency that brings this about. And that's why low-income people get hit with this.

On the other hand, young people and students - it's a different situation. In their cases, it's usually because of some form of what I call benign neglect or absentmindedness. They just didn't quite pay attention to it or they just weren't mindful of their accounts.

But you can also have some other issues that come up with young people and one of them is peer pressure. You're out with your friends. You don't want to lose face, so you put that money on the debit card and you go into your overdraft. So those things can also affect young people.

MARTIN: Alvin, I'm going to ask you this first and then, Ylan, I'm going to ask you this, as well, that there are those who might argue that the banks are doing the right thing by paying the larger items first, that - you know, why wouldn't you want to pay your mortgage first or the furniture company or the big ticket items first? That that's just, you know, either common sense or a service to the customer.

What is your take on the fact that this is also being viewed as a way to game the fees? What's your assessment of this?

HALL: It is a way to game the fees, and this is actually an old story. Banks have been doing this for years since the days of check clearing. They would clear checks, the largest ones first, and then they'd clear the smaller one so you'd rack up more overdraft fees.

What happened, though, now is that the fees are so high after they went through a period of what I call fee madness where they charged a fee for everything. So you now can rack up fees that are way in excess, that are absolutely abusive. So - yes - banks have been doing this and they will come up with another way of doing this.

People forget that banks will see that drop from 37 billion down to 27 billion and think, we're losing money. We're losing revenue. What other ways can we create that will generate this income that we've lost on one hand?

MARTIN: Ylan, what do the banks that you speak to say about this?

MUI: Well, I think that there certainly is a role that overdraft plays for some customers. Right? Again, they're saying that some people want the larger purchases to go through first and I think that, also, the regulators, the Federal Reserve in particular, has acknowledged that it's important to remember that these overdraft restrictions only apply to charges on your debit card. Right? So any sort of purchase that you might make.

But they found that customers really want their checks and recurring automatic purchases to go through because those are things that are usually used to pay significant bills, such as mortgage, rent, student loans, car insurance, etc. So there has been some attempt by both regulators and the banks to recognize that, for some customers, this is an important service that they actually want.

There's estimates for the amount of people who have actually opted into overdraft range from 22 percent to 75 percent of customers who have opted into this service, so clearly, there is some demand for it. The question is, at what level and what should the size of the fees be.

MARTIN: I'm talking with financial reporter Ylan Mui from the Washington Post and our regular contributor on matters of personal finance and the economy, Alvin Hall, about overdraft charges; whether these are fair, and a new scrutiny of these charges by consumer watchdogs and a newly created federal watchdog group, which is questioning whether these overdraft charges are being timed in such a way as to maximize profits for banks.

So let's look ahead, each of you, and I'll ask you this. What do you envision as a result of this investigation? Ylan, I'm particularly interested in how it would - how would you demonstrate that there's an intention to maximize fees as opposed to provide a service in the way that you think customers would prefer? As I said, you know, paying, like, the mortgage or the car note first. How do you think they could go about demonstrating intention here?

MUI: Well, there are a couple of things. This is a question that a federal agency is now looking at, but has actually been playing out in the courts for several years now. Wells Fargo was already ordered to pay $203 million in fees back to customers because a judge found that they were doing this in a way that unfairly penalized customers. Several other large banks have settled similar lawsuits. So this is something that is already sort of being played out in the court system.

Now, regulators are looking at it, as well, and saying, is there an enforcement action that we might have to take? Or are there new regulations or are there new rules that we might need to create?

The banking industry, of course, is saying that they're open to this, they expected this and that they believe that an inquiry based on fact will show that, you know, they're upholding the current standards.

MARTIN: And, Alvin, I'll give you the final word here. What would you hope that we would learn from this, just in the scrutiny of this practice? What do you hope comes from this?

HALL: I think that people need to learn that these credit cards and debit cards and other forms of plastic should be used very sparingly. You should definitely keep a core amount in your bank that you need to cover your recurring debits, your online bills and any other automatic things that come out of your account.

And then you should limit how frequently you use that card at an ATM or your debit card and carry an amount of cash with you so that you can cover certain expenses, so you are not tempted to go over your limit.

So I think people need to exercise more financial discipline. Carrying money around in your pocket may feel good, but limit that amount.

MARTIN: You know, there's talk of putting something on bank statements that say, you know, something prominent that says, this is how much you incurred in overdraft charges and this is what you could do to avoid this. Do you think that that would be helpful, Alvin?

HALL: Absolutely, I do. Because I think, when people see the amount that it adds up to in the course of a month, they will be shocked. When I did money makeovers on my show, Your Money, Your Life, and we would show people that number, they were often shocked and I would say, think of what you could have done with that money over the course of a quarter or a month. And that starts to change financial behavior.

MARTIN: Alvin Hall is our regular contributor on matters of personal finance and the economy, our money coach. He joined us from our studios in New York. Ylan Mui is a financial reporter for the Washington Post. She joined us from their studios in Washington, D.C.

Thank you both so much for speaking with us.

HALL: You're welcome.

MUI: Thank you.

(SOUNDBITE OF MUSIC)

MARTIN: Just ahead, an eye-catching new report says the majority of children born to mothers under the age of 30 are now born to single mothers and that has gotten a lot of people talking about whether that is good for babies and moms. No, we're not talking with Rick Santorum. We're talking with our diverse panel of moms about this. That's just ahead on TELL ME MORE from NPR News. I'm Michel Martin.

(SOUNDBITE OF MUSIC)

MARTIN: Later this week, Google will make changes to its privacy policy. It will start collecting what you search for, phone numbers you call and even your location. That has many users up in arms and they're asking if there's anything they can do to stop Google from knowing too much. We will have the answer next time on TELL ME MORE.

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