The way banks manage your checking account has come under heavy fire recently in two separate studies that show that:
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- Banks bury key information about checking fees and policies in overly complex disclosure forms that average 111 pages, even though a simple chart would suffice.
- Banks bullied many customers into continuing to accept exorbitant overdraft charges with misleading scare tactics.
- Banks have reserved the right to "reorder" transactions in ways that maximize overdraft penalties. This reordering includes posting withdrawals before deposits and posting the largest withdrawals before smaller withdrawals.
More regulation needed for checking accounts?
These findings come from the Pew Charitable Trust's report "Hidden risks: the case for safe and transparent checking accounts" and a survey by the Center for Responsible Lending.
Although overdraft charges and credit cards have come under more federal regulation in recent years, the reports make the case for more oversight on banks' checking practices. Nine in 10 Americans have a checking account, and those accounts generate billions of banking transactions a day, making them essential to the U.S. economy, Pew noted.
Pew, in studying 250 types of online checking accounts offered by the 10 largest banks in the U.S., identified five practices that "put consumers at financial risk" by charging them way more than the service is worth. These include:
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- Using long, confounding disclosure statements that make it impossible to easily compare online checking accounts. This practice involves scattering information across different media and not summarizing key features.
- Withholding information about overdraft charges when customers sign up.
- Overcharging for overdrafts. Despite new restrictions on overdraft fees, American consumers will pay an estimated $38 billion in overdraft charges in 2011--more than ever before. The median overdraft penalty is $35, yet the median overdraft amount is $36.
- Reordering transactions to maximize overdraft fees. Although some banks have publicly announced that they are taking steps to correct this practice, most retain the right to post your transactions in way that maximizes the penalty to you, including posting your withdrawals before your deposits. Only two of the banks in the study commit to posting deposits before withdrawals.
False advertising about overdraft protection
To make matters worse for checking customers, the Center for Responsible Learning's survey found that even though most customers don't want high-cost overdraft protection, many opted in anyway. This, the center concluded, was because they were misled, thinking that:
- They would be charged a fee if their debit card was declined for insufficient funds. No fee is charged for that.
- They wanted to avoid bouncing checks, even though the opt-in rules only covered debit card and ATM card transactions.
The center blamed these misconceptions on bank "scare tactic" advertising that warned that opting out of overdraft protection would lead to embarrassing situations, interrupted checking activity, steep returned-check fees and other vague but dire consequences that were deceptive.
Possible reforms for checking accounts
Pew recommended a series of reforms that would protect consumers. In particular, it recommended all banks start employing a concise online checking account summary box similar to the Schumer Box created for credit cards. These charts would list simple answers to standard features, such as the minimum amount needed to open an online checking account, the monthly fee, returned check fee and ways to avoid the monthly fee.
Pew also recommended that overdraft penalties by proportional to the bank's costs--a graduated structure similar to one used for credit cards--and that deposit and withdrawal policies are fully disclosed and "neutral" and not designed to gouge the customer.
The original article can be found at Money-Rates.com:
Banks under fire for checking account policies that hurt consumers