2017 Bank Fees and Overdrafts

Most consumers still don't know they are not required to accept their bank's overdraft protection service, according to the Pew Charitable Trusts' latest consumer finance project.

The study examined the behavior of consumers who use bank overdraft programs and the fees they incur as a result.

Before the law was changed in 2010, banks automatically enrolled consumers in overdraft protection. If consumers made purchases that overdrew their accounts, the banks covered the expense and then assessed an overdraft fee, which often cost as much as $35.

However, that led to instances where a consumer might overdraw their account four or five times on a single shopping trip, incurring a $35 fee each time.

Consumers must opt-in

Since the law changed, consumers must opt-in to this coverage -- banks cannot automatically enroll them. Thaddeus King, officer of The Pew Charitable Trusts’ consumer finance project, says it's clear consumers don't understand that overdraft protection is not only costly, but unnecessary.

"Most consumers don’t know they can have transactions declined at no cost- that’s a multi-billion dollar problem," he told ConsumerAffairs.

Consumers without overdraft protection can't use their debit card to make a purchase if they've overdrawn their accounts, but they don't pay a fee either. In fact, having a purchase declined serves as an alert that they've got a problem.

The Pew survey also found that banks' communication with consumers about overdraft programs is not very effective. Even consumers who had talked with a bank representative about overdraft protection showed a lack of understanding about how it worked.

Eight million have opted-in

In September a survey found that an estimated eight million consumers have opted-in, primarily because they thought they had to. Two-thirds of consumers who agreed to pay the overdraft fees were unaware it was optional.

"Better information, stronger protections, and allowing small installment loans are the three tools to fix the overdraft problem," King said.

But the survey discovered that a significant number of consumers knew exactly what they were doing. It found some are using overdraft programs as a short-term loan, albeit an expensive one. Still, for most purchases, it's less expensive than a payday loan.

The study authors say consumers who use overdraft as a way to borrow money would be better served if their bank offered small installment loans with lower costs, affordable payments, and more time to repay.

To better understand overdraft program options, check out the Office of Comptroller of the Currency (OCC) requirements as they relate to bank marketing efforts.

Federal regulators have sued debt settlement service provider Freedom Debt Relief (an Authorized Partner) for what it considers deceptive business practices. 

The Consumer Financial Protection Bureau (CFPB) alleges the company charges consumers without settling their debts, requires them to negotiate their own settlements, provides misleading information about fees and services and does not inform consumers of their right to money they deposit.

In a statement issued late Thursday, the company said "We firmly believe that the CFPB fundamentally misunderstands how debt settlement works and has acted without proper regard for the consumers it is charged with protecting. We want to set the record straight and share our perspective.”

The company's website says the firm has resolved debts for nearly 400,000 people. They also have many positive reviews on their ConsumerAffairs profile.

CFPB Director Richard Cordray says Freedom Debt Relief (an Authorized Partner) misled consumers about its clout with lenders, all the while knowing it would not actually negotiate with creditors. The government's lawsuit seeks compensation for customers, civil penalties, and an injunction to prevent future "unlawful conduct."

How debt settlement works

Generally, debt relief or debt settlement companies offer a service to debt-burdened consumers to intervene with creditors–in most cases credit card companies–and secure a lower payoff amount. Often, desperate consumers enter into these agreements without fully understanding how they work.

Credit card companies will eventually accept a lower amount than what you owe, but consumers must stop making payments on the credit card bill for an extended period of time. 

During that time, the consumer will face constant calls from debt collectors and his or her credit score will plunge. A charged off debt will show up on a consumer's credit report for seven years.

A debt relief firm offers to be the broker between the credit card company and the consumer to negotiate a settlement. Only after it secures a settlement is it legally allowed to collect a fee from the consumer.

Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC) says people struggling with debt should give serious consideration to non-profit credit counseling services for help as an alternative to debt settlement.

“These allegations are deeply troubling and call attention to the need for more consumer awareness about the dangers associated with some of the most misleading claims of the for-profit debt settlement companies,” McClary told ConsumerAffairs.

Banned debt settlement companies

Last year the Federal Trade Commission (FTC) banned hundreds of companies and individuals from the debt settlement business for repeatedly violating the law–in many cases collecting upfront fees. The agency advises debt burdened consumers to consider all options, including credit counseling and bankruptcy protection, before signing up with a debt settlement company.

As stated in the CFPB lawsuit, certain creditors have instituted policies not to negotiate with debt settlement companies. Consumers owing money to one of these creditors will therefore be required to negotiate directly with the creditor.

While a debt settlement firm may offer "coaching" and other services to these consumers, CFPB says these companies must inform customers that they may be required to negotiate any settlement on their own.

A survey by personal finance site NerdWallet finds consumers remain largely unaware that their banks' overdraft "protection" is optional, costing them $100 or more in fees each year.

In 2010, Congress enacted a law requiring banks to allow customers to "opt-in" to this service, in which the bank covers the deficit if a customer makes a debit charge with insufficient funds. However, the bank charges at least a $30 fee for this service. Before the law was passed, banks automatically enrolled their customers.

But the NerdWallet survey, conducted by the Harris Poll, found 66% of consumers are unaware of their legal option to pass this up.

Being unaware of the law, however, does not mean consumers get automatically signed up -- they still have to opt-in. So why are an estimated eight million consumers enrolled in their banks' overdraft programs?

Eight million have opted-in

"Overdraft coverage sounds like a good deal, but it’s usually better to steer clear of it," the NerdWallet editors write. "It means banks may charge you a hefty fee when transactions– including debit card swipes–cause your account to drop below zero."

If you make a debit purchase that overdraws your account without overdraft protection, the purchase is simply declined at the point of sale. It alerts you if you have insufficient funds in your account, but more importantly, it does not trigger a fee.

$3.5 billion in unnecessary fees

The NerdWallet editors estimate the eight million consumers who are enrolled in bank overdraft protection end up paying over $3.5 billion in unnecessary fees. A NerdWallet analysis of data from the Consumer Financial Protection Bureau (CFPB) estimates a consumer who frequently overdraws his or her account pays about $442 in overdraft fees each year.

The CFPB has found that the transaction amount on a debit card that leads to an overdraft is quite small -- the median was $24 in 2014. Factor in a $35 overdraft fee, and the real cost of the transaction is $59.

“If you’re in danger of getting hit with an overdraft fee, then it’s worth asking yourself if your next purchases are really worth the price that you could pay; often the answer is ‘no,’” said Kimberly Palmer, NerdWallet’s in-house expert on credit cards and banking.

Consumers get enrolled in these overdraft programs when their banks send them marketing material, promoting it as a helpful feature. Unless you specifically notify the bank you would like to be covered, it cannot charge a fee when you make a debit purchase with insufficient funds.

Banks have changed a lot since your parents' generation, and many of those changes accelerated after the 2008 financial crisis.

In the low-interest rate, risk-averse climate that followed, the banking model began to shift from making loans to charging fees.

Personal finance publisher Kiplinger reports that model remains largely intact nine years after the financial crisis, but its investigation has identified a few institutions, in different categories, that have distinguished themselves with more consumer-friendly service.

Tie among national banks

Among national banks, Kiplinger declares a tie between TD Bank and US Bank.

TD Bank wins points for its low, $100 minimum balance to avoid a service charge and low minimums for savings accounts and CDs. US Bank has 3,000 branches in 25 states and offers several checking account options with easily achievable requirements to avoid a service charge.

Among nationally available credit unions, Kiplinger gives the nod to Virginia's Langley Federal Credit Union. Consumers can join by making a $5 donation to one of several Virginia causes.

Members can then select from four checking accounts, three of which are free of a monthly fee. The simplest is the basic Smart Checking account, which has no minimum balance to avoid a monthly fee.

Best internet bank

Kiplinger rates Ally Bank as best among internet banks. Ally wins points by simplifying things with one checking, one savings and one money market deposit account. There is no minimum balance required to avoid a monthly fee.

Diane Morais, president of Consumer & Commercial Banking Products at Ally Bank, notes her institution not only won honors as best internet bank, but also as best bank for Millennials.

"Being named a 'best bank' in these two important segments gives customers the confidence to explore our other offerings – from our savings, checking and credit card products, to newer additions like Ally Home loans and low-cost investing through Ally Invest," Morais said.

According to Kiplinger, it is important for consumers to be selective when it comes to choosing a bank, since the divide between consumer-friendly banks and those that aren't so friendly will probably continue to widen.

Many banks are on a mission to cut costs and raise revenue and, very often, consumers pay the price. The best banks, Kiplinger says, tend to offer a mix of no or low-fee checking, competitive interest rates, and reimbursements for ATM fees. They also have user-friendly websites.

Consumers should also not overlook community banks. While not as well publicized, they are more likely to have free checking with fewer requirements and offer the same services as larger banks, but at lower costs.

Personal finance and wealth managers are looking over their shoulders these days. The automation that has crept into all phases of industry is getting into their space too.

Machines that pick investments and manage portfolios are known as robo advisors. They use computer algorithms to manage investments, usually at a lower cost than a human advisor.

Proponents say investors not only save on fees, the machines provide features like automatic portfolio rebalancing and tax loss harvesting.

In a recent study of the most popular robo advisors, personal finance publisher NerdWallet picked Wealthfront and Betterment as the best overall. Both won points for their low account minimums, ease-of-use, and cool features.

But some investors may need that human interaction. The Pennsylvania Department of Banking and Securities advises investors to ask seven questions before signing up with a robo advisor.

"While these online services may provide short-term convenience, investors should evaluate robo advisors in accordance with their long-term investment goals," said Pennsylvania Secretary of Banking and Securities Robin Wiessmann.

Investors should stay engaged

And while robo advisors offer a lot of services usually reserved for wealthy investors, Wiessman says it's still important for investors to stay engaged and not depend entirely on a machine.

The questions Wiessman says need answering are:

1. What are your investing goals and how do you want to reach them?
2. What are the costs of using a robo-advisor compared to using a human advisor?
3. Is your personal information safe with a robo-advisor?
4. Are you willing to stop or decrease the amount of investing advice you receive through human interaction?
5. What are the different approaches to investing used by different robo-advisors?
6. Is your money being directly invested or sent to other funds ("feeder funds") that might charge additional fees?
7. Is the robo-advisor properly licensed?

Wiessman says no matter whether your advisor is a person or a robot, investors still need to clearly understand what is being done with their money. And it may take a little sleuthing.

"The relationships between robo-advisors, investment products, fees, and other companies and funds are not always clear,” she said. “Investors should always investigate before investing."

The U.S. Supreme Court today ordered a lower court to take a closer look at a New York law that bars merchants from imposing surcharges on credit-card purchases. It's part of a long-running battle by retailers to chip away at the $50 billion they pay credit card companies in so-called "swipe fees" each year.

A federal appeals court had upheld the law, saying it was a form of price regulation. But Chief Justice John Roberts wrote that the measure actually regulates speech, which subjects it to the tougher requirements of the First Amendment. The decision to return the case for review was unanimous.

“In regulating the communication of prices rather than the prices themselves, Section 518 [the New York law] regulates speech,” Roberts wrote.

The ruling is "an important step toward allowing retailers to tell consumers about the added costs of credit card payments," said the Retail Industry Leaders Association.

“This unanimous ruling ... is an important acknowledgement of the true value that transparent price communication provides,” said Deborah White, RILA senior executive vice president and general counsel. “The Court’s ruling affirms the right of retailers to communicate honestly with their customers about the true cost of credit cards.”

RILA, joined by other associations, filed an amicus brief earlier this year urging the Court to "recognize the importance of transparent merchant communication to consumers about credit cards costs."

"Not the bad guys"

Retailers say that if they were allowed to explicity impose surcharges on credit card purchases, it would discourage card use, reduce their swipe-fee costs, and enable them to pass the savings on to consumers. 

In his opinion, Robert said merchants "want to make clear that they are not the bad guys—that the credit card companies, not the merchants, are responsible for the higher prices.” 

New York is one of 10 states that limit how merchants can describe lower cash prices. Appeals are also pending from cases in Florida and Texas.