It's called "courtesy overdraft" and has long been used by banks to automatically pay transactions that account holders don't have the money to cover — and then charge them a steep fee. For years, banks have made it easier for customers to overdraw their checking accounts, aided by a cottage industry of consultants who make big money by helping to wring fees out of consumers, a USA TODAY analysis finds.
But what began as a customer service has often become an important revenue driver for banks at the expense of the most vulnerable consumers, according to bank memos reviewed by USA TODAY and interviews with industry insiders.
"This practice has gone awry and needs to be fixed," says Alex Sheshunoff, a key consultant who once advised banks to pay, not return, overdrawn transactions. "This is something everyone should be trying to find a solution to, not fighting."
Today, each of the nation's 10 largest banks allows consumers to overdraw with checks, debit cards or at ATMs, a 2009 USA TODAY survey reveals. Large banks also reserve the right to process large transactions first, triggering more overdraft fees by emptying the account more quickly. Some even charge consumers before they overdraw by deducting a purchase when it's made, rather than when it clears, pushing the account into the red sooner.
President Obama signed legislation in May limiting certain credit card practices — such as rate increases on existing debt — that have pushed consumers deeper into distress in a sliding economy. The government also wants to create a consumer protection agency to supervise loans. Meanwhile, the Federal Reserve is examining the fairness of certain overdraft practices.
It's unclear whether those efforts will be enough to rein in overdrafts, now the single-largest driver of consumer fee income for banks. In 2009, banks are expected to reap a record $38.5 billion from overdraft fees, nearly twice the $20.5 billion they stand to collect from credit card penalties such as late and over-limit fees.