Image: Customers using ATMs
Lisa Poole  /  AP file
A Bank of America customer can make an ATM withdrawal when there’s not enough money in the account. But they must agree twice to pay the overdraft fee of $35 before they get the cash.
By Herb Weisbaum ConsumerMan
msnbc.com contributor

I thought we’d put this one to bed last summer when the Federal Reserve changed the way banks and credit unions handle debit card overdrafts. But we’re not there yet. Consumer groups claim the industry still is using misleading marketing to sell its overdraft protection programs.

Financial institutions are now required to get your permission (a so-called “opt-in”) before they can add debit card overdraft protection to your account. In the past, customers were often signed up automatically — without their knowledge or explicit consent — and charged around $35 per overdraft.

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“Unfair overdraft fees cost Americans $24 billion a year, driven largely by high fees on small debit card transactions,” says Kathleen Day with the Center for Responsible Lending.

Bankers knew the Fed rule would mean a dramatic drop in revenue. So they launched aggressive marketing campaigns to convince customers to say “yes” when asked to sign up for the protection.

Day says the marketing was often “misleading and sometimes downright deceptive.” She accuses some financial institutions of using “scare tactics” to persuade people to opt-in.

The CRL says marketing materials often created the false impression that emergency action was needed when the bank pitched credit card overdraft protection. In a report released in April, CRL cited these examples:

“We Need to Hear From You . . . To keep your account operating smoothly . . . To avoid any interruptions in how we service your account, we need to hear from you.”

“Please keep in mind that this option [not opting in] may prevent you from completing everyday transactions including any store and gas station purchase, emergency home and car repair... purchases when traveling, medical or health emergencies.”

Based on a nationwide survey, the report lists why checking account holders asked for the overdraft service. 

  • Sixty percent said they did so to avoid a fee if their debit card was declined. Fact: A declined debit card transaction does not cost the customer anything. They simply can’t buy what they want.
  • Sixty-four percent said they wanted to avoid bouncing paper checks. Fact: Debit card protection programs do not cover checks, only point-of-sale debit card purchases and ATM transactions.
  • Almost half of those who signed up said one reason they did it was to stop the bank’s barrage of opt-in messages by mail, phone, email, on-line and in person.

I contacted the American Bankers Association to find out what they had to say about all this. I was promised a response, but have not yet received one.

A few banks lead the way
Consumer groups point to Citi as an example of how banks should treat their customers. Citibank does not authorize debit card overdrafts.  If you don’t have enough money in the account to cover the purchase or the ATM withdrawal, the bank will decline the transaction. Since there’s never an overdraft, there’s never a fee.

Citi spokesperson Natalie Marin tells me the bank believes the Fed’s opt-in rule “does not go far enough to protect consumers.”

Bank of America now has a similar policy for point-of-sale debit card transactions. If there’s not enough money to cover the purchase, it’s simply declined.

“Our customers told us they did not like surprise charges,” says BofA spokesman Don Vecchiarello. “Reaction has been very positive and our complaints about overdrafts have gone down.”

A Bank of America customer can still make an ATM withdrawal when there’s not enough money in the account. But they must agree twice to pay the overdraft fee of $35 before they get the cash.

These are all voluntary steps. And the banks are to be commended for them. Consumer groups want comprehensive protection that is required by federal regulation.

“Right now, there’s no cap on the overdraft fee,” says Jean Ann Fox, director of financial services at the Consumer Federation of America. “There’s no limit to how many fees you can be charged in a day or month or a year on your bank account. There’s no requirement that the fees be reasonable and proportional to the cost to the bank of handling the overdraft.”

Fox and other consumer advocates hope the new Consumer Financial Protection Bureau, which is set to open for business in July, will tackle these problems.

Story: Big battle brews for future of consumer protection agency

You do have options
We all make mistakes. And when several people in the family have debit cards it’s easier than ever to overdraw your account. So here are two simple ways to deal with that:

  • Sign up for overdraft protection that’s reasonably priced. You do that by linking your checking account to another account (checking or savings) and make sure you have some backup money in that account. Should you overdraw, the bank will transfer money from that other account to cover the payment. The transfer fees run around $5 - $10 a day. That sure beats $35 per overdraft.  If your bank doesn’t tell you about this option, ask about it.
  • Don’t opt-in to the banks pricey overdraft protection program. If you won’t have enough money to cover the transaction at the point-of-sale or the ATM, your transaction will be declined. You can buy it later or figure out another way to pay. Because you can’t overdraw your account, you’ll never get an overdraft charge. Yes, this can be a bit inconvenient, but you’ll never pay $39 for a cup of coffee.

Don’t worry if you already signed up for the bank’s expensive debit card protection program. You can always cancel. You didn’t make a lifetime commitment.

“In fact, we would encourage anybody who has opted in to opt back out again,” says consumer advocate Jean Ann Fox.

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