Overdrawn accounts become more common as electronic banking, Check 21 law speed transactions
Edward Cutler doesn't understand why it takes so long for the checks he
deposits into his account to clear, when it seems the checks he writes
to other people clear almost immediately.
"I've taught math, studied differential calculus, have a doctorate
degree and even I can't figure out what my balance is to keep from
bouncing checks," the Columbus pediatrician said.
One thing is clear: Managing checking-account transactions can be
confusing, sometimes causing otherwise responsible customers to bounce
checks.
People who do accidentally overdraw their accounts are paying a heftier price.
Bounced-check fees are at an all-time high, according to Bankrate.com.
The average fee nationwide is $27.40, up from $23.06 in 1999.
And consumers seem to be paying more of them.
Banks collected $33 billion in insufficient-fund and bounced-check fees
in 2003, according to research firm Moebs $ervices in Lake Bluff, Ill.
Fees are expected to reach $53.1 billion this year.
A confluence of events has made it harder for consumers to manage their
checking-account balances, making them more likely to overdraw their
accounts, said Jean Ann Fox, director of consumer protection with the
Consumer Federation of America in Washington.
"The only thing you used to be able to bounce was a
check. But now, you can overdraw your account at an ATM and using your debit card," Fox said.
"People assume that if they don't have money in their account, the bank
won't clear those transactions, but that's not the case anymore."
Changes in the regulations that govern checks have also made the
process confusing and frustrating for consumers, said Greg McBride, a
financial analyst with Bankrate.com.
"The fact is that checks clear faster because of Check 21," he said.
Check 21, a law that went into effect in 2004, sped up checking-account
debits by allowing banks to use electronic images of checks to process
transactions. It turns paper checks into electronic debits that can
clear almost immediately.
Unfortunately, Check 21 didn't speed deposits.
Adding to the problem is the variation in the way banks and retailers
process checks and debit-card transactions. That makes it harder for
consumers to keep a handle on their balances.
"Wal-Mart can take your check and convert it into an electronic (debit)
right there, but a check you write to a mom and pop (store) might not
get to the bank for a week," said Jeff Kastelic, senior vice president
of product management with National City.
"People think the banking system works in real time, but it doesn't."
Debit transactions aren't always processed immediately, either.
A person can overdraw his account multiple times in a single day paying
with a debit card, because some retailers wait until after business
hours to process payments. In that case, the money isn't subtracted
from the account until the end of the day. In the meantime, the bank
clears purchases because it appears there is money to cover it.
"Banks assume all the transactions you authorize are against good money
that you know you have in your account," said Tom O'Hara, senior vice
president and director of deposit products with Huntington National
Bank.
Also, no laws govern the order in which banks process the checks people
write, said Val Young, vice president of retail operations with Fifth
Third Bank in central Ohio.
Most national banks and larger regional banks cash the largest checks first, she said.
It's a controversial practice, Fox said. When larger checks clear
first, it can cause several smaller checks to bounce, socking customers
with multiple bounced-check fees.
"It's very profitable for banks," Fox said.
Banks say profit isn't the motive.
"Large checks are usually the most important in peoples' lives: their
rent or their mortgage payment," said Jeff Lyttle, spokesman for Chase
Bank. "Consumers don't think about it, but would you rather bounce the
check you wrote to the dry cleaner or for your mortgage?"
Some banks also process withdrawals before deposits, Fox said, causing more checks to bounce.
To stay out of trouble, she said, "You have to assume the banks adopt policies to benefit the bank, not you."
"There's a misconception that banks want people to bounce checks,"
O'Hara said. "Unpaid overdrafts are a liability for banks. The
second-most-common type of check fraud is from overdraft customers who
don't pay."
American banks lost about $677 million to check fraud in 2003,
according to the American Bankers Association. About 17 percent of that
is attributed to unpaid bounced checks.
Overdraft fees, the group said, are "supposed to be a deterrent" to keep check fraud at the lowest level possible.
But there is no doubt that banks profit from them.
In 1984, fees accounted for 25 percent of bank income. By 2001, the
amount had risen to 43 percent, according to a report by Federal
Reserve economist Kevin Stiroh.
"Fee income has taken a more prominent role in bank revenue," McBride
said. "The (bank's) goal is to stabilize earnings that would otherwise
be subject to the fluctuation of interest rates."
Customers, it seems, are getting angry. "It's an emotional transaction.
People feel guilty when they make a mistake and don't want to walk away
feeling the bank was mean to them," O'Hara said.
Some banks have addressed this by implementing tiered fees for
overdrafts. People who rarely bounce a check pay a lower fee than those
who bounce checks more often.
Chase, Huntington, Key Bank, National City and U.S. Bank use tiered fees on some of their accounts.
Huntington recently eliminated fees on overdrafts that are less than $5, to reduce fees from debit-card slip-ups.
Banks also have tried to help customers by "spending a significant
amount of money to make sure people know in real time what their
balances are," O'Hara said.
Customers can keep tabs on accounts online, through automated phone
services, at ATM machines, and with their monthly statements, he said.
Consumer advocates aren't buying it.
"Banks say you can avoid fees," Fox said. "But they are putting out a
bunch of hurdles then telling you it's your fault if you can't get over
them. There is no coincidence here."
Some relief might be on the horizon, McBride said. Regulators will be
reviewing the hold times on deposits next year, to see if they can be
shortened.
In the meantime, McBride said, "fees aren't going away." •
Sidebar: Account vigilance
Check your account balances frequently
* About 59 percent of people check their balance at least once a week.
"That means (up to) 41 percent don't really know if the money is there
or not" when they write a check, said Tom O'Hara with Huntington
National Bank. Online or phone banking can give you a better idea of
your balance.
Sign up for an overdraft-protection program linked to a savings account
* For less than the cost of an overdraft fee, money is automatically
transferred from another account to cover the check or debit.
Forget the float
* You no longer can write a check, then deposit the money to cover it
the next day. To avoid fees, assume that every check written or
debit-card purchase will clear instantly.
Fake yourself out
* Stash $100 in your checking account, but don't include it in your
balance. That way, when you think your account is at zero, you really
have $100 to cover any accidental overdrafts.
Read the fine print
* The terms-and-conditions brochure for checking accounts should
outline the bank's funds availability policy for deposits, fees for
each account, and to some extent how transactions are processed. If you
don't see an answer, ask before opening an account.
Sources: Bankrate.com, Consumer Federation of America, Huntington National Bank, National City Bank
By Denise Trowbridge, The Columbus Dispatch
