Big banks soften overdraft wallop

For millions of consumers, the cost of overdrawing a checking account is about to become a little less painful.

Facing harsh criticism for raising fees during a severe recession, and with congressional legislation looming, several of the nation's largest banks -- including Wells Fargo, JP Morgan Chase and Bank of America -- plan to stop charging consumers fees of $25 or more when they overdraw their accounts with debit cards by small amounts. In addition, the banks said they will reduce the number of times customers can get hit with overdraft fees in a single day.

Though immediately criticized by consumer groups as being too modest, the moves mark the first time in decades that the nation's large banks have taken steps to reduce debit card overdraft fees, which generate tens of billions of dollars in revenue each year. The new policies are likely to put pressure on smaller regional banks to lower their fees, say industry analysts.

Wells Fargo, which is Minnesota's largest bank by share of deposits, said it will soon allow current and future customers to opt out of overdraft coverage, meaning that customers can turn off their ability to spend once their accounts hit zero. Then their purchases would be automatically rejected at the cash register if they don't have enough money in their accounts to cover the total.

The banks are also taking steps to limit fees on small purchases consumers might have avoided had they known they would be charged an overdraft fee. For instance, both Wells Fargo and JP Morgan Chase said they will cancel overdraft fees for all accounts overdrawn by $5 or less. This makes it less likely that someone will end up paying $35 for buying a bus ticket or a cup of coffee.

And the banks are moving to address long-standing complaints that they process transactions to maximize their overdraft revenue. At the end of each day, banks typically lump together transactions and process large ones first, which empties accounts faster and can result in multiple overdraft fees on smaller purchases.

Now, JP Morgan Chase, which has 25 million debit card accounts nationally, says it will process debit-card payments and ATM withdrawals before processing checks.

The banks' actions this week are unlikely to appease consumer groups that have been pressuring Congress for legislation to reduce overdraft fees and improve disclosure. Last week, Sen. Christopher Dodd, D-Conn., said he was drafting a bill that would require banks to cover overdrafts only when consumers ask for it -- a so-called "opt in" clause.

The Federal Reserve is also considering two proposals aimed at protecting consumers from overdraft fees. One would require banks to obtain permission from customers before charging them overdraft fees on ATM and some debit card transactions. The other would require a bank to ask permission before enrolling someone in an overdraft program. A decision on these proposals is expected by year-end.

Even with the new changes, the big banks have yet to lower the overdraft fees themselves -- which have been rising year after year and which many consumer advocates consider too high. The average overdraft fee last year reached $28.95, up from $21.57 a decade ago, according to Bankrate.com. This year, Bank of America raised its overdraft fee to $35 from $25.

"I would be more congratulatory if the banks were actually lowering" fees, said Jean Ann Fox, director of financial services for the Consumer Federation of America. "It's still a very steep penalty to pay for people in a situation where the bank could have denied the customer."

Yet, some bankers, including TCF Financial Corp. chief executive Bill Cooper, argue that the recent fury over overdraft fees is misplaced.

In an interview Wednesday, Cooper argued that a majority of consumers want the bank to cover payments in case of an overdraft. Requiring customers to "opt in" would leave many consumers stranded in cases where they really need to make a purchase.

"Let's say you're in Duluth in January, and it's 17 degrees below and you're out of gas and you're trying to get home," Cooper said. "And the machine doesn't authorize the transaction. You're going to be angry."

Cooper noted that about 60 percent of all transactions that appear overdrawn at the point of a purchase are actually not overdrawn when the transaction is later processed by the bank, and new deposits are accounted for. At TCF, that's about 3 million transactions a year. If customers can't overdraw their accounts, even temporarily, then millions of transactions would be rejected at the register, he argued.

"All this political stuff, Congress is just trying to cover up what it failed to do with the banking crisis," he said. "They're screwing up a system that works just fine and isn't broken."

Cooper said he was not planning changes to TCF's overdraft fee of $35. The bank, the 10th-largest issuer of Visa debit cards in the nation, generates about $26 million each quarter from card fees -- nearly 10 percent of its revenue.

Others in the banking industry argue that the issue of overdraft fees has been overblown because they only affect a minority of bank customers. A recent survey of 1,000 consumers, commissioned by the American Bankers Association, found that 82 percent of bank customers did not pay any overdraft fees in the previous 12 months. Of those who did pay overdraft fees, more than one-third said they only paid one.