Wednesday, September 23, 2009

Add NSF fees to the list of commercial banking reforms

Wednesday, the New York Times published a story announcing that two commercial banks, Chase and Bank of America, were preparing to reduce the fees that occur when a customer’s balance becomes negative.

Anyone who runs a month-to-month family budget knows that in recent years many commercial banks have slowly adjusted account policies in ways that increase their revenue from fees.

In the spirit of full disclosure, my wife and I used to hold accounts at Bank of America. In 2006, we became alarmed at the contents of a series of policy notices we received, and eventually canceled our accounts in 2007 after experiencing the “snowballing effect” in which a $7 overdraft and a delayed deposit credit resulted in more than $200 in bank fees and charges.

We opened an account with Wells Fargo, largely because friends who bank there suggested the bank was more customer-centric than some of the other larger banks.

But the Wells Fargo experience proved similar (and in fact, given this morning’s announcements, WF might be less hospitable to its customers than Bank of America and Chase). My current concern involves the insufficient funds policy on a customer’s checking account, but I’ll return to that momentarily.

The September 9 New York Times article by Ron Lieber and Andrew Martin, “Overspending on Debit Cards Is a Boon for Banks," featured Wells Fargo. Peter Means, a 59-year-old graduate student from Colorado, cited a case in which Wells Fargo charged him $238 for seven transactions, each less than $12. This is the “snowball effect” in action: one transaction exceeds the balance of an account, and each subsequent bank fee makes it more difficult for an account holder to return the balance to positive numbers. And, as numerous customers have pointed out (check out an entry posted on from the fall of 2006 or even the muckraking site Wells Fargo Watch), deposits and credits are often delayed at least 24 hours for verification, whereas debits and charges are posted within the same transaction day, exacerbating the snowball effect and delaying efforts to repair the damage to one’s account.

Ron Lieber wrote a follow-up article explaining why this practice began and why it’s not likely to change in the near future.

Add to this mix changes concerning the ordering of transaction reports. According to Hagens Berman Sobol Shapiro, the firm launched a suit against Wells Fargo in Seattle for its practice of ordering daily transactions from largest to smallest (which effectively maximizes bank fees, because smaller charges that might have otherwise been covered are calculated last. Overdraft fees are assessed per transaction, not by the amount a customer overspends). Similar suits have been filed against Wachovia, though this practice appears fairly standard among commercial banks.

I called Bank of America customer service after the announced implementation of this policy. The individual with whom I spoke claimed that the policy change was geared to better serve the customer (the standard argument is that a customer would want to cover larger expenses like mortgage payments and car payments, rather than have them returned). I asked at the time what data had been collected from customers concerning this preference (I am, after all, a social scientist and am always interested in survey and focus group methodology), but the representative could only cite vague claims of customer requests. I repeated this exercise recently with Wells Fargo, specifically requesting, as a customer, that my account clear smaller transactions first. The customer service representative I spoke to again cited the policy’s intent to “serve the interests of our customers” and explained that “the computers” could not be reconfigured to handle my account differently.

As I said, my small contribution to the laundry list of concerning bank practices involves the non-sufficient fund (NSF) fee policy changes. As anyone who’s ever bounced a check knows, banks and commercial retailers both charge penalty fees for writing a check that exceeds one’s available funds. The new policy change involved the reporting mechanism.

When a retailer is informed that a transaction failed to clear the customer’s bank account, the standard practice is to submit the check for payment again, to make sure the problem is not due to a banking error. Only when a second failure is reported will many retailers take the next step of contacting the customer to rectify the situation.

What has changed at commercial banks like Wells Fargo is the manner in which NSF fees are applied to checks. Currently, a customer is charged an NSF fee for each attempt a retailer makes to deposit a customer’s check into their account. In effect, this means that a $10 check that does not clear a customer’s account will most likely accrue multiple NSF fees, at least $70 from the bank in addition to the $25-35 the retailer will charge the customer. Unlike debit card transactions, which are pre-approved at the moment of transaction, customers who bounce a check typically face around $100 in fees per transaction, as well as the original amount of the transaction no longer honored.

The same deregulation that led to the recent financial upheaval on Wall Street would appear to be at least partly responsible for these recent policy changes. With a wider portfolio of increasingly leveraged assets, it’s understandable why most commercial banks have altered their policies to generate more revenue. What isn’t understandable is why these alterations are framed as having the customer’s interests at heart.

Labels: , ,