New rules that were added three years ago to make the fees for overdrawn checking accounts more transparent and less costly seem to be something less than a triumphant policy success.
Total fees for overdrafts did decline from 2009's record $37.1 billion but still came to $32 billion for 2012. A Consumer Financial Protection Bureau (CFPB) study released last week found that the average fee paid by people who had at least one overdraft was $225 in 2011.
Susan Weinstock of the Pew Charitable Trusts, which has advocated for changes including much simpler disclosures, explained that consumers keep paying because so many remain hopelessly confused.
Pew found in 2012 that 54 percent of consumers who had overdrawn on a debit card and then been dinged $35 or so by their banks later said that they never gave the bank permission to do so, a so-called "opt in." This consumer choice requirement was one key rule implemented in 2010.
Can it really be possible for more than half of American debit card holders who had been charged a fee to later insist that they hadn't authorized their banks to do it?
"Yes, exactly," Weinstock said. "When we were doing our focus groups on disclosure statements, we heard people say things like 'I have opted in for overdraft protection so I don't have to pay the $35 fee.' Well, obviously if you opt in you are going to pay the most expensive kind of overdraft [fee]."
So what we have are consumers thinking themselves pretty savvy for signing up for overdraft protection to protect them from … overdraft protection.
The new rules were driven by anger over these fees, when a single swipe from a debit card for a small purchase could trigger a $35 fee for a consumer who had made a simple bookkeeping mistake. It was the era of the 99-cent taco costing $35.99. That wasn't a service, fairly priced; it was an outrageously expensive bank loan to finance a taco.
In addition to requiring financial institutions to ask for authorization to add this service on debit cards for point-of-sale and automated teller machine transactions, there were other rules including requirements for more simplified disclosures, to make it possible to shop for checking accounts.
There's clearly a long way to go, but it's also not fair to suggest that nothing's gotten better for consumers.
At U.S. Bank, for instance, a small mistake of being overdrawn less than $10 at the end of the day now gets covered for no fee. Overdraft items of $15 or less generate a fee of $15 rather than the usual $35 and the bank has daily fee caps, too. It has rolled out ways for the consumer to set up automatic alerts, such as a text message to a mobile phone, if the checking balance falls below $100.
Best of all, it has boiled down key information on checking accounts onto a one-pager called Simple Snapshot, the shortest and clearest information on fees from a bank I have ever read.
U.S. Bank also changed its practice of reordering the way transactions posted in an account. U.S. Bank, like others in the industry, had once posted the greatest transaction amount first.
That often triggered an overdraft, and then generated additional overdraft fees for each of the smaller transactions posted after that big one, even though they may have occurred first and thus had taken place when there was enough money in the account.
The CFPB study found other banks that have adopted more consumer-friendly practices. But read through the report and ones from Pew in the last couple of years and it's clear that it's up to consumers to escape the worst of these kinds of fees.
My own default position on a product offered by reputable financial institutions is this: You probably don't need it. And overdraft protection for debit cards seems to be an easy call.
The cost of not having it may be an embarrassing moment at the front of a long lunch line at McDonald's if a swipe is declined for insufficient funds, but that's a lot cheaper than $15 or $35.
A consumer can also link the checking account's debit card to another account, such as a savings account or credit card, to serve as a backstop to the main checking account. A common fee for tapping a linked account is $10.
Of course those ideas are little help to people who have no money for a savings account and who can't qualify for an affordable credit card.
Moebs Services, a research and consulting firm, reported earlier this year that 38 million of the 134 million consumer checking accounts have frequent overdrafts, not because consumers are sloppy but because household finances are just that tight.
Making the point that competition and clarity would bring down the cost of what are, in effect, hugely expensive small loans, Moebs noted that most frequent overdrafters also go to payday lenders. The median cost on a $100 advance from a payday lender is $16 vs. the much higher median fee for overdrawing a checking account.
Borrowing costs that high for low-income people are one reason why Eastside Financial Center, a program of Lutheran Social Service of Minnesota, is about to roll out its own prepaid debit card in conjunction with financial education. Eastside Financial provides budgeting and debt reduction counseling in St. Paul, and director Eva Song Margolis explained that the appeal of prepaid debit cards is certainty on exactly how much money can be spent and no unplanned fees.
And like me, she was struck by just how much money banks, thrifts and credit unions collect on overdraft fees.
"If it's $32 billion that's an incredible amount," she said, "largely being harvested from low-income folks."