Banks are feeling intense pressure to cut fees charged to customers who overdraw checking accounts.
Leading banks in the the Twin Cities and nationwide are curtailing those charges, but perhaps not enough to satisfy Congress, banking regulators and consumers.
Say you use your debit card to buy a $2 cup of coffee, but you don't have enough money in your account to cover the purchase. So, your bank let's the transaction go through, as a courtesy it says. But then the bank hits you with a $34 overdraft fee.
Such automatic overdraft protection programs bring banks and credit unions an estimated $34 billion a year, according to consulting firm Oliver Wyman. But the fees anger many consumers like Kathy Schlangen.
Schlangen said she's rarely had to pay them, but she still thinks the fees are outrageous.
"I wish they were more lenient," she said. "I don't think all the fees are fair. If I were living strictly paycheck to paycheck and I was two days off from payday, I could easily incur $200 in overdraft charges. That would be enormous."
Congressional leaders are threatening to curb overdraft charges.
“The rules are going to change.”Bert Ely, banking industry consultant
"The rules are going to change," said banking industry consultant Bert Ely. "It it will take time to see how all that will work out."
Ely said the political pressure to roll back the fees is great, even though only about a quarter of consumers get nailed for them. But the fees average $34 and some banks hit customers with them up to ten times a day.
"It is the amount of individual fees as well as the total number of fees that could get rung up in a particular day that have caused so much political ire," he said.
Consultant Aaron Fine said dwindling income from overdraft fees may lead banks to look for other ways to get money out of those customers.
"A lot of people that currently enjoy free checking wouldn't have that any more," Fine said. "Those people would probably have either their cost of banking go up by having a new minimum balance fee or potentially the services go down."
The vast majority of consumers do not overdraw their checking accounts. A study by federal regulators found 5 percent of consumers account for nearly 70 percent of overdraft charges.
Banks, including Wells Fargo and U.S. Bank, who between them both control more than half the bank deposits in the Twin Cities, are hoping to head off government mandates by taking action themselves.
Wells Fargo will eliminate overdraft fees for customers when they overdraw their accounts by $5 or less, and the bank will charge no more than four overdraft fees per day. In addition, Wells Fargo will give customers the option of blocking check and debit card transactions if customers don't have enough money in their accounts.
Meanwhile, U.S. Bank will eliminate overdraft fees when a customer's account is overdrawn by less than $10 and limiting overdraft fees to no more than three per day. The bank will also better publicize the option it already gives customers to block transactions that would overdraw accounts.
"They can ask us to not pay for that cup of coffee," said Trent Spurgeon, who oversees consumer products at U.S. Bank. "Or, in the case of checks, if they don't want the checks to be paid, we can reject them."
But consumers who bounce a check may pay a penalty, even if it doesn't go to the bank. Merchants can charge people up to $30 for a rubber check, and some merchants also assess a penalty if an automatic electronic payment is rejected.
TCF, the number three bank in the Twin Cities, is reviewing its overdraft policies as well. But TCF insists says most people are happy to pay an overdraft fee to make a check good or to complete an essential purchase.
"We're giving them a break, it's a service that we offer," said Jason Korstange, a spokesman for the bank. "Ninety-five percent of the time, they will say they were happy that happened. They weren't embarrassed; they were able to get their purchase completed. Unfortunately, we had to charge them a fee."
Korstange said TCF has allowed customers to opt out of the bank's standard overdraft protection program for five years, but he estimates less than 1 percent chooses that option.
In a brochure about avoiding overdraft fees, TCF does note customers can request a block on debit and ATM card transactions that would put their accounts in the red, and Korstange said overdrafts are also avoidable if people closely watch their account balances.
Overdraft fees are the only thing that makes some customers profitable for banks. Those folks may not keep much money in their accounts. But they regularly overdraw their accounts, generating steady fee income for banks.
Aaron Fine, a partner with the Oliver Wyman consulting firm, says dwindling income from overdraft fees may lead banks to look for other ways to get money out of customers.
"A lot of people that currently enjoy free checking wouldn't have that any more," he said. "Those people would probably have either their cost of banking go up by having a new minimum balance fee or potentially the services go down."
Banks may less inclined to keep customers who habitually overdraw their accounts. A study by federal regulators found five percent of consumers account for nearly 70 percent of overdraft charges.
Consumer advocates contend even truly conscientious people can get nailed repeatedly for overdraft fees. That can happen if a deposit takes longer than expected to clear or if a bank processes the biggest withdrawals first. That can maximize the number of overdrafts.
Leslie Parrish, a senior researcher at the Center for Responsible Lending in Durham, North Carolina, said recent bank actions on overdrafts are only baby steps.
Parrish said many banks still automatically enroll customers in protection programs that charge hefty overdraft fees.
"People should be given a basic choice of whether they want to be enrolled in these overdraft loan programs before the banks just automatically enroll them," she said.
Parrish urges consumers to consider alternative forms of overdraft protection, including linking a checking account to a saving account or some line of credit. She said they are far less expensive ways of preventing an overdraft.