September 2009 Archives

In another sign that consumers are becoming more vigilant about their finances, the American Bankers Association finds that an overwhelming majority of Americans are avoiding overdraft fees.

In its annual survey, the ABA said 82% of consumers kept check on their balances and steered clear of what can be hefty fees on an account that gets drained.

In a speech to the financial community at New York's Federal Hall, President Obama proposes an ambitious overhaul of the industry, including creating a new consumer protection agency.

What's more, most are learning from their mistakes: 36% of those caught without enough in their checking or debit accounts got hit only once in the last year with an overdraft fee.

At the same time, however, 35% got stuck with four or more overdrafts. Eleven percent of those had six to 10, which at about $29 a pop could cost a consumer as much as $290.

"Anyone's bank account can fall short from time to time but overdraft fees are 100% avoidable," said Nessa Feddis, ABA senior federal counsel and retail expert. "Just like a parking ticket, they're meant to be a deterrent."

The results come at a time when most Americans are reining in spending and borrowing less. The Federal Reserve said last week consumers chucked debt for the sixth straight month in July. Total borrowing for most everything but real estate plunged a record 10.4%, on a seasonally adjusted annual rate, to $2.47 billion. That's a $21.6 billion decline from June, which saw debt drop 7.4%. Read more on the contraction in consumer debt.

That means that banks are making less money on credit cards and turning to fees -- and in particular overdraft fees -- to cover the gap. Banks also are hiking fees on credit, ATM and checking accounts. See full story.

In a recent survey by economic researcher Moebs Services Inc. some 45% of banks, savings institutions and credit unions acknowledged that their overdraft fee income was greater than net income.

This year alone, Moebs said, banks are looking at cashing in a record $38.5 billion in overdraft fees. See full story.

How to protect yourself

Consumers can sidestep overdraft by following the ABA's tips:

• Have your paycheck directly deposited into your account. You will have immediate access to your paycheck.
• Always keep track of your balance and transactions, including automatic payments. You can track balances and transactions online, by phone or at the ATM, 24 hours a day. Some banks even offer mobile banking so you can check your balance on your cell phone. Remember, though, that those balances will not reflect transactions you authorized that have not been processed by your bank.
• Keep a "pad" or cushion of money in your checking account. Just to be safe.
• Link your checking account to a savings account or credit card. These are usually less expensive alternatives, but remember to pay them off.
• Ask your bank for an overdraft line of credit to cover you. Just be sure to pay it back as soon as you get the bill.
• See if your bank offers automatic notification when your balance drops below a certain level. Many banks will notify you by text message or email.
• Change banks if your bank doesn't offer the services you would like, or charges too much for overdrafts. There are literally thousands of banks competing for your business.

This is not good PR for the banking industry. And I don't just mean the fact that banks are engaging in the practice of charging overdraft fees for debit card purchases. I'm actually talking about the industry responses in the article. They do nothing to ingratiate banks in consumers' minds (and boy howdy do they need some ingratiation...).

Backstory: Instead of declining debit card transactions, many banks let the transactions happen, take the account into overdraft, and hit the customer with (some would say exorbitant) fees for the overdraft. It's a well-known, "profitable" practice, and a bit shady in my opinion. The card networks have the embedded capability for the issuer to decline the transaction. In the case of credit cards, if the cardholder is over his/her limit, the transaction is declined. Same should hold true for debit cards (at least for those that run over the V/MC rails, and probably for those that run over the EFT networks as well). If the transaction will take the account into overdraft, the logical action on the part of the issuer is to decline the transaction.

So the response from the industry when confronted with this? (Granted, these are selective responses...but they are the ones that made it into the NYT article). Here are a few...

1. "Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date."

Personally, I'd rather be embarrassed and pay cash for dinner than not be embarrassed and pay the fees later. Yes...I'm joking around, but the cavalier response does nothing to indicate that the banking industry is backing the consumer. "Protecting them from embarrassment?!" Please...

2. "'Everyone should know how much they have in their account and manage their funds well to avoid those fees,' said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions."

Seriously? That's what you got? "People should manage their own finances?" What about all the talk of financial institutions being a friend to the consumer and assisting consumers in managing their finances? What about the premise of the debit card as a vehicle to do that??? Not good. Definitely not good.

3. "Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney's legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation's banks and credit unions collect more from overdraft services than they make in profits, he said."

Again: SERIOUSLY?? "Banks will go out of business if they can't do this." Hey, I sympathize with needing to earn a profit. But you're not going to ingratiate yourself with regulators, Congress, and the American public if you're trying to turn a profit in an underhanded manner (and I'm being nice in characterizing it that way). Oh, and did I mention that the financial services industry is in dire need of ingratiation these days??

So...rather than sweeping this under the rug and hoping it will go away, let's at least make an effort to get the industry messaging right. Perception is reality. The FIs that can win the consumer perception battle are often the ones that win the customer acquisition battle.

Or so it would seem.

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks -- and a $34 fee. He got the $6.50 student discount at the movie theater -- but no discount on the $34 fee. He paid $6.76 at Lowe's for screws -- and yet another $34 fee. All told, he owed $238 in extra charges for just a day's worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.

Banks and credit unions have long pitched debit cards as a convenient and prudent way to buy. But a growing number are now allowing consumers to exceed their balances -- for a price.

Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer's balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer's transactions in a way that causes more of them to incur overdraft fees.

"Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card," said Eric Halperin, director of the Washington office of the Center for Responsible Lending.

Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation's largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.

Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year's end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.

The Federal Reserve is considering requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers like Mr. Means are not caught unaware at the cash register.

Representative Carolyn Maloney, Democrat of New York, would go even further by requiring warnings when a debit card purchase will overdraw an account and by barring banks from running the most expensive purchases through accounts first.

The proposals carry considerable momentum given the popularity of credit card legislation signed into law in May. They also have a certain inevitable logic, since the credit card legislation requires a similar "opt in" decision from consumers who want to spend more than their credit limits and pay the corresponding over-the-limit fees. Overdrafts are simply the reverse, where the limit is zero, and the bank charges a fee for going under it.

But with so much at stake, the banking industry is intent on holding its ground.

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

"Everyone should know how much they have in their account and manage their funds well to avoid those fees," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney's legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation's banks and credit unions collect more from overdraft services than they make in profits, he said.

"Will they be able to replace it with another fee?" Mr. Moebs said. "Not immediately and not soon enough."

They will certainly try. For instance, some banks have said they might slap a monthly fee of between $10 to $20 on every free checking account. At the moment, people who pay overdraft fees help subsidize the free accounts of those who do not.

Banks may also have to answer a question that many consumers ask and that Ms. Maloney has raised in her proposal: Why can't banks simply alert a consumer at the cash register if they are about to spend more than they have in their account, and allow them to say right then and there whether they want to pay a fee to continue?

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The Debit Card: Trap or Sound Choice?

The banking industry says that simply is not possible without new equipment and software, costs that would be borne by consumers.

"If you think about when you swipe your card at, let's say, Starbucks or at the Safeway or the Giant, there is no real sort of interaction there," said Mr. Talbott. "It's just approved or disapproved. So how logically would that work? Would a screen come up? Would someone at the bank call the checkout clerk and say, 'That customer is overdrawn?' Logistically that would be very difficult to implement."

No one could have imagined this controversy decades ago, when the A.T.M. card was born. Back then, it was simple: when money ran out, the card was usually rejected by the banks.

But then A.T.M. cards started acquiring Visa or MasterCard logos, allowing users to "debit" their bank accounts for purchases. A thorny issue soon sprang up. What if there wasn't enough money in a cardholder's account to cover a purchase?

For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer -- and charge consumers for each transgression.

"You are doing them a favor here," said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Some institutions do not see it that way, and either do not offer overdraft services or allow their clients to decline the service. "We've never subscribed to the notion that individuals who overdraw or attempt to should be allowed to do so without the opportunity to opt in," said Gary J. Perez, the president and chief executive of the University of Southern California Credit Union.

A Source of Easy Money

But many of the nation's banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject.

In all, $27 billion in fee income flows from covering overdrafts from debit card purchases, A.T.M. transactions, checks and automatic payments for bills like utilities; an additional $11.5 billion arrives from bounced checks and other instances in which banks refuse to pay overdrafts, Mr. Moebs said.

By contrast, penalty fees from credit cards will add up to about $20.5 billion this year, according to R. K. Hammer, a consultant to the credit card industry. For instance, customers incur penalties for paying their bills late or by spending beyond the credit limit the bank has set for them. Banks also make billions in interest from credit cards.

Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

Advocacy groups say banks are making a fortune because consumers are unaware of the exorbitant costs of overdraft services. And banks, they argue, have an incentive to keep it that way.

That is what Mr. Means found when he approached his Wells Fargo branch in Fort Collins, Colo., to redress the $238 in fees he was billed. An employee explained that her ability to waive fees had been revoked by the bank because she had refunded fees for too many customers, Mr. Means said she told him.

Rory Foster, a former branch manager in Illinois, said that Wells Fargo based its compensation for managers in part on overall branch profitability. Fee income, including that from overdrafts, is part of the calculation.

A spokeswoman for Wells Fargo, Richele J. Messick, said the bank did not tie branch manager pay directly to fee collection.

'I Can't Afford That'

Yet fees, and how they are generated, remain a mystery to many consumers. Because regulators do not treat overdraft charges as loans, banks do not have to disclose their annualized cost to consumers.

And often, the price is enormous. According to the F.D.I.C. study, a $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520 percent. By contrast, penalty interest rates on credit cards generally run about 30 per "People would be shocked at how brutally high those fees are relative to the costs of a credit card," said Edmund Mierzwinski, the consumer program director for the United States Public Interest Research Group.Skip to next paragraph

Ruth Holton-Hodson discovered that the hard way. She keeps close tabs on the welfare of her brother, who lives in a halfway house in Maryland and uses what little he has in his account at Bank of America to pay rent and buy an occasional pack of cigarettes or a sandwich.

When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.

Ms. Holton-Hodson said she spent two years asking bank employees if her brother could get a card that would not allow him to spend more than he had. Though Bank of America does not typically allow customers to opt out of overdraft protection, it finally granted an exemption.

"I've been angered and outraged for many years," she said. "When there is no money in his account, he shouldn't be able to pay."

Anne Pace, a spokeswoman for Bank of America, said the case was "complicated issue without any simple solutions," but declined to elaborate, citing privacy concerns. She added the bank allowed customers to opt out of overdraft services on a "case-by-case basis."

And when a consumer does overdraw an account, banks have found a way to multiply the fees they collect by rearranging the sequence of transactions, critics say.

Ralph Tornes, who lives in Florida, is pursuing a lawsuit against Bank of America for charging him nearly $500 in overdraft fees in 2008 after it rearranged his purchases from largest to smallest. In May 2008, for instance, Mr. Tornes had $195 in his account when he made two debit purchases for $8 and $13; the bank also processed a bill payment of $256.

He claims that Bank of America took his purchases out of chronological order and ran the biggest one through first. So instead of paying $35 for one overdraft fee, he was stuck with three, for a total of $105.

Mr. Talbott, of the Financial Services Roundtable, said some banks reordered purchases based on surveys showing that consumers want their most vital bills, like rent and car payments, which tend to be for larger amounts, paid before items like a $3 coffee.

Consumers who have been slapped with large fees as a result of this practice have a different perspective. "There is no reason they should get the little guy because he's only got a few bucks in his account," said Ryan Pena, 24, a recent college graduate who has filed suit against Wachovia, now part of Wells Fargo, for what he says are abusive practices, including reordering his purchases. "I can't afford that."

Officials at Bank of America and Wachovia declined to talk about specific complaints, but echoed Mr. Talbott's remarks on processing payments.

The Debate in Washington

These lawsuits open a window onto the questions that government officials and banks are now trying to answer. Do consumers actually want overdraft service? Can they use it responsibly? If so, what is the best way to deliver it?

Federal regulators have acknowledged problems with overdraft fees since at least 2001 but have done little aside from improving disclosure and issue voluntary guidelines they hoped the industry would follow. That year, Daniel P. Stipano, deputy chief counsel for the Office of the Comptroller of the Currency, wrote that a company that markets overdraft programs to banks showed a "complete lack of consumer safeguards."

In 2005, after intense industry pressure, the Federal Reserve ruled that overdraft charges should not be covered by the Truth in Lending Act. That meant bankers did not have to seek consumers' permission to sign them up, nor did they have to disclose the equivalent interest rate for the fees.

That same year, the Federal Reserve said that some banks had "adopted marketing practices that appear to encourage consumers to overdraw their accounts." It issued a list of "best practices" that asked banks to more clearly disclose overdraft fees, let customers opt out of overdraft programs and provide an alert when a purchase occurs that would put the account below zero. But critics said the recommendations had no teeth.

"No regulator has made any of their bank examiners adhere to best practices," said Mr. Halperin, of the Center for Responsible Lending. "The result is over that time period consumers have paid probably upwards of $80 billion in overdraft fees while the Federal Reserve considers and considers and considers whether or not they are going to do anything."

Officials at the Federal Reserve dispute that they have not taken sufficient action on overdraft fees, noting that they imposed tougher disclosure requirements in 2004 and are now considering additional regulations to address abusive practices. They will disclose their intent before the end of the year.

What no one disputes is that the stakes in the coming battle on overdraft fees are enormous. Ms. Maloney said she did not push her overdraft legislation this spring because the uproar from the banking industry could have jeopardized the credit card bill.

"It was very important to provide more tools to consumers to better manage their credit cards," she said. "And now I think they deserve the same treatment with debit cards."

Debit cards fees have become a major source of revenue for banks as their profits from other business shrink. For consumers, the quickly mounting fees -- as much as $35 for each overdraft -- can become a financial disaster. Some in Congress have noted that this practice is particularly harmful for low-income and elderly consumers who often don't know that they are being charged. But bankers say that overdraft service and fees can be easily avoided if consumers simply don't spend more than what's in their checking accounts.

Where does the responsibility lie? Is it with consumers who fail to balance their checkbooks and unwittingly rack up these fees? Or should there be tighter federal regulation of debit cards and overdraft fees?

Regulators Must Step In

Rebecca Borné is policy counsel at the Center for Responsible Lending, a nonprofit research and policy organization.

The banking industry perpetuates the myth that it charges overdraft fees to deter customers from overdrawing again. But small debit card purchases are the most common trigger of overdraft charges. The sure-fire way to deter overdrafts is not by covering them and surprising consumers with a fee. It's by denying the transaction in the first place. That's exactly what most banks did as recently as 2004.

Not anymore. Today, most banks cover transaction after transaction, charging an average $34 a pop and collecting at least $7.8 billion a year in debit-card overdraft fees. Why should a $6 sandwich end up costing $40?

We need an agency dedicated to consumer protection -- now.

Low-cost reasonable alternatives exist, like a line of credit or automatic transfer from a savings account. But banks only automatically enroll customers in the costliest program, and they do so without obtaining a customer's explicit consent. Then, the banks subject customers to pervasive practices designed to maximize unexpected fees. For example, nearly all banks clear debit transactions from highest to lowest, rather than in the order they occur -- a practice that depletes an account more quickly to maximize overdrafts.

To turn this unfair system around, regulators should acknowledge that overdraft fees on debit card purchases and A.T.M. withdrawals are never justified because the bank could easily deny the transaction for no fee.

They should make banks obtain a customer's explicit permission before enrolling anyone in a program that covers overdrafts for a charge. And they should require that overdraft fees bear some relationship to a bank's cost of covering the overdraft, as Congress just required for credit card penalty fees.

Instead of competing on who can offer the most valuable services, our nation's banks seem locked in a race to the bottom. The Federal Reserve has waited too long to step in and require fair overdraft practices. That delay is a good example of why an agency dedicated to consumer protection -- the Consumer Financial Protection Agency, currently under consideration by Congress -- is needed.

Banks Deserve the Compensation

John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, a free-market think tank.

As banks have lowered limits on credit card lines -- partly as a result of the misguided "Credit Card Holders Bill of Rights" that passed Congress last May and put severe restrictions on card issuers' ability to adjust rates for a customer's credit risk -- debit card use is on the upswing. Debit cards offer the convenience of credit cards, including the security of not having to carry around cash that could be subject to loss or theft.

Consumers need to realize that overdrafts are loans that come with fees associated with a bank's willingness to take on risk.

But unlike a credit card, debit cards are linked directly to bank accounts, and do not have the feature of a "balance" that can be paid off in 30 days. If a consumer runs up charges that exceed the value of his or her bank account, the bank is not obligated to cover any of these charges. However, many banks offer "overdraft" protection that will cover certain amounts go past the amount in customers' accounts. But as with any extension of credit, the bank will typically charge a fee and interest.

Anecdotes have focused on consumers allegedly paying $40 for a fast food item because they didn't know they had overdrawn their accounts. But surveys even from critics of overdraft fees show that these consumers are a minority, and that the vast majority keep careful tabs on their accounts. A March survey commissioned by the Center for Responsible Lending found that 72 percent of bank account holders had not overdrawn in the past year.

Consumers using debit cards need to keep track of their accounts and treat overdrafts as a type of loan. They should also shop around with banks and credit unions about various options that would better serve them in the use of debit cards. Fees and interest can be lowered by setting up "linked accounts" that will draw from a consumer's credit card or line of credit when their checking accounts are overdrawn. In fact, the Center for Responsible Lending survey found that about a third of consumers have such linked accounts.

As for Congress, it should resist legislation by anecdote, particularly price controls on overdraft charges. If banks can't be compensated for the risk in allowing overdrafts, many wouldn't offer this option, and many consumers would suffer the embarrassment and inconvenience of having to put items back when they overcharge. Some consumers also knowingly use overdrafts as a type of loan. As long as they know the terms of such a transaction, they should have the ability to do this as consenting adults.

Congress should also turn down corporate welfare demands by big retailers to in effect force many consumers into debit cards by putting price controls on the "interchange fees" that merchants pay to credit card issuers. This would shift these processing costs to consumers, and lead to a reduction in credit card "rewards" such as airline miles, as has happened when interchange fee controls were pushed through in Australia.

Credit and debit cards both offer benefits to consumers, and competition and accurate disclosure will give them a variety of options to choose from. Price controls limit these options with many destructive unintended consequences.

A Simple Technological Answer

Samuel L. Myers, Jr., an economist and professor of policy analysis, is director of the Roy Wilkins Center for Human Relations and Social Justice at the University of Minnesota.

Debit cards can offer a better way to manage your money than credit cards. They serve as a form of cash, and in many instances can be used wherever credit cards are accepted.

This is particularly true for the poor who are less likely to have credit cards. However, good management of debit cards rarely improves one's credit score. Moreover, there is a perverse relationship between poor credit and debit cards: those with poor credit are unable to get credit cards and thus end up using debit cards (or cash or checks) and then are unable to accumulate the credit records required to improve credit.

When there is a potential overdraft, the transaction should be declined. Why is this so difficult?

Historically African Americans have saved and did not use credit as a form of purchasing consumer products, as my research with Sheila Ards on consumer credit and savings behavior ("The Color of Money: Bad Credit, Wealth, and Race," American Behavioral Scientist 45(2) (October 2001)) showed.

This all changed and now blacks and Hispanics have far lower credit scores than whites and much higher debt levels. They are more likely to default on loans and are more likely to face foreclosure. But this is not because of inherent deficiencies in their ability to manage their funds. Rather, it is often the result of policy-induced actions by lenders and banks.

While I would argue that debit cards are a better way to manage finances than are credit cards, I think the simple application of existing technology would prevent overdrafts on debit cards, and the high fees that follow.

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Whenever there is a potential overdraft, the transaction should be declined. This is certainly what happens when a credit card user exceeds her credit limit. What prevents the banks from using the same automatic system to decline purchases or A.T.M. withdrawals when there is a potential overdraft?

Permitting (or encouraging) overdrafts and then charging for them is almost criminal. The solution, in my view, is to give customers the option of paying an overdraft fee (secured by a line of credit or a savings balance) or always having a transaction for which there are insufficient funds declined. Why is this so difficult?

Transparency on Transactions

Ronald J. Mann is a professor at Columbia Law School and author, most recently, of, "Charging Ahead: The Growth and Regulation of Payment Card Markets Around the World."

For the average consumer, borrowing typically comes at three interest rates: 18 to 24 percent on a credit card, 400 to 500 percent on a payday loan, and 1000 to 3000 percent for an overdraft on a debit card.

The Federal Reserve and Congress are now considering ways to address the issue of overdraft fees, notably by requiring that consumers receive more disclosure about the fees at the time a checking account is opened. The recent New York Times editorial goes further, suggesting that banks must notify consumers at the point of sale before finalizing a transaction that would result in an overdraft fee.

It is not at all clear that consumers would reject overdraft services, even with high fees, if given a choice.

I believe that automatic notification when an account is overdrawn at the point-of-sale would be far more effective than the paperwork-related reforms currently on the table. Simply putting disclosures on a form -- even if the information is detailed about risks and fees -- is just too remote from the actual transactions that could result in high fees. Of course, banks are not vigorously opposing this paperwork regulation precisely because it does little to change consumer behavior.

By contrast, regulations to require disclosure of overdraft fees at the point of sale on debit cards (and over-the-limit fees on credit cards) would make the fees truly transparent at the moment they are imposed.

Who is to say how consumers would respond? Would you want to pay $25 extra for that cup of coffee when you easily could pay with cash in your pocket? Would you want to pay $25 extra for the week's worth of groceries you are buying to tide yourself over until your next paycheck?

To be sure, redesigning the software for payment card terminals requires new resources, but those terminals are upgraded to accommodate new services every few years. A phased-in requirement would not impose a big financial obstacle to banks or retailers.

On the other hand, the benefits of such a requirement are substantial. It is not at all clear that consumers would reject overdraft services, even with high fees, if given a choice. But unless banks allow this kind of transparency, we won't know the answer.

Enabling Destructive Behavior

Richard Briesch is associate professor of marketing at the Cox School of Business at Southern Methodist University. His research focuses on modeling consumer decision making, pricing and sales promotions.

While the issue of overdraft fees for debit cards is clearly important, when a consumer habitually overdrafts a debit card (i.e., has one or more overdrafts every several months), it becomes a symptom of a deeper problem: the lack of financial literacy.

This lack of financial literacy is an epidemic in the United States. A recent study by Harris Interactive found that 57 percent of households do not have a budget, 32 percent do not have any savings and 26 percent admit to not paying all of their bills on time.

Banks should be required to make the fees proportional to the overdraft amount.

A study by Professor Annamaria Lusardi at Harvard showed that financial illiteracy is rampant in the U.S. and has a disproportionate effect on minority groups. More evidence of this problem comes from a recent report by the Heritage Foundation, suggesting that 60 to 80 percent of the homeowners who refinance their mortgages through the Homeowner Affordability and Stability Program will fall behind on their mortgage payments within one year. The clear implication is that financial illiteracy has an effect on every aspect of the consumer economy.

More financial education, possibly starting as early as middle school, could help. The U.S. government has a Web site devoted to providing financial education, and banks and other financial institutions provide free financial education as well.

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Consumers have to take responsibility for their financial decisions. But does that mean that the overdraft fees are fair?

Banks should, of course, be able to recover their costs associated with overdrafts, and should be able to provide services to consumers who request and can afford them (i.e., "opt-in" to the service). However, consumers should not be charged $35 for a cup of coffee, or have $200 worth of overdraft charges for $17 worth of goods.

Banks should not be allowed to be enablers of financially self-destructive behavior. They should be required to make the fees proportional to the overdraft amount, and be required to deny transactions for consumers who habitually overdraft their debit cards.

Can't Balance Your Checkbook? Use Cash.

Dave Ramsey is the host of "The Dave Ramsey Show," the popular weekday national radio show based in Nashville that focuses on money management. He is the author of several best-sellers, including "The Total Money Makeover."

A few years ago using a debit card guaranteed that you couldn't spend more money than you have. Unfortunately, banks found another way to make money by allowing debit card users to go past their balance and then charge them an overdraft fee. Of course, these fees aren't an issue if you are living on a budget, know how much you are spending and don't spend more than you have.

You have to take responsibility for your finances -- you can't rely on the bank to do that. They are in the business of making money, not the business of making sure you are responsible with yours.

Do a written budget every month. Give every dollar that you make a name before the month begins. Income minus outgo should equal zero at the bottom of the page. Then stick to the budget. If you have trouble sticking to the budget while using a debit card, then try using cash.

We have an emotional attachment to cash -- it hurts when we have to give it up. That makes us think more carefully about our spending. If you use cash for awhile you'll get used to staying on a budget. Then you can go back to using debit cards ... without the overdraft fees.

Bounced-Check Economics

Todd J. Zywicki is a professor of law at George Mason University and a senior scholar at the university's Mercatus Center. He contributes regularly to The Volokh Conspiracy, the legal weblog.

Last year, use of debit cards by consumers surpassed the use of credit cards. This substitution trend will likely accelerate this year as continued problems in credit markets have reduced the supply of credit at the same time that newly enacted regulations on credit card terms have led to higher prices, lower credit limits, and reduced availability for credit cards.

A debit card, of course, is nothing more than an electronic version of a check. Yet although consumers see nothing objectionable about being assessed fees or overdraft charges for bouncing a check, there has been widespread outrage that similar fees are inappropriate for debit cards. Are they right?

Overdraft insurance is expensive, but a bounced check costs far more.

For an economist, the basic question is a simple one: when a consumer exceeds the amount in his bank account, would most consumers prefer to have the payment later dishonored (as with a bounced check) and be forced to pay the equivalent of bounced check fees, or would a borrower prefer to have the payment approved and be assessed an overdraft fee

Many consumers don't realize their bank may automatically let a debit card transaction go through even if there is not enough money in the checking account. A fee then accompanies the purchase, no matter how small, that exceeds your balance.

Here's how to avoid needing that service.

TURN IT OFF Stop by the branch or call on the phone and ask to turn off the overdraft protection. Many banks will do this if you ask. But make sure you understand what will happen if it says yes. In addition to cutting your debit card off when you're at the store and low on funds, will it also refuse to allow bounced checks to go through? What about A.T.M. transactions or, say, the electric company that pulls the bill amount from your checking account each month?

While you're at it, if you help older, infirm or distracted friends or relatives with their finances, look into their overdraft coverage as well.

KEEP A CUSHION Some banks, like Bank of America and Wells Fargo, generally won't let you switch off overdraft coverage. If you are running into similar roadblocks, keep a $1,000 cash cushion to give you some margin for error when checks don't clear on time or you're squeezed for a few days. You'll need discipline, however, to keep from spending it.

FIND A NEW BANK Can't afford a cushion? Shop for a new checking account. You're more likely to find one that doesn't have automatic overdraft coverage at a smaller bank or credit union. If you're set on shielding yourself from this service, make sure to ask more than one person at the new institution about it to be certain it doesn't exist there.

LINE OF CREDIT Ask your bank or credit union if it will extend you credit in lieu of overdraft coverage. This gets confusing, since some institutions call this an overdraft "line of credit" instead of overdraft "protection." With the line of credit, you pay, say, 18 percent annually on whatever you borrow to make up the shortfall in your checking account. With overdraft protection, you pay a $30 or $35 fee when you overdraw, even if you were just under zero and a deposit soon cleared to put you back in positive territory.

BACKUP ACCOUNT Have a savings or money market account at the same institution where you do your checking? Ask if you can link them. If you overdraw, the checking account can grab money from the backup source. Brokerage firms that also offer checking accounts often allow this. And PNC Bank's Virtual Wallet system allows you to link two backup accounts to the main checking account.

SET ALERTS Check your bank or credit union's Web site to see if it can alert you if your balance gets low. Often, you can tell the site the balance level at which you want it to send you warnings by e-mail or text.

USE THE ACCOUNT LESS One severe approach is to drastically limit your transactions. Make fewer (and bigger) A.T.M. withdrawals. Stop using checks. And put everything on a credit card that you pay once each month when you know you have the money.

The sad irony of this is that credit cards may have been what you were trying to get away from in the first place. -- RON LIEBER

Those shiny pieces of plastic are looking rougher beneath the surface.

For a growing number of consumers, especially those who don't use banks or credit cards, prepaid cards are an increasingly popular choice.

But these cards that you load up with cash and use to make purchases, pay bills or withdraw money are fraught with fees and lack the kind of protection credit cards and debit cards have, a new report from Consumers Union found.

"There are fees for just about everything," said Michelle Jun, a staff lawyer for Consumers Union. "It's very important to look at what you will be using the card for and what it will cost you."

Prepaid cards are catching on. Nearly $4 billion was loaded on to general purchase reloadable prepaid cards in 2007, according to Mercator Advisory Group.

Consumers Union reviewed the terms and conditions of 18 different prepaid debit cards, including the Walmart MoneyCard and Russell Simmons' RushCard, and showed how quickly the costs can add up.

Activation fees ranged from a low of $3 for the Walmart card to up to $99 to initiate the Millennium Advantage Card.

Of the 18 cards, 15 had monthly fees, ranging from $2.95 a month for Discover's nFinanSe reloadable card to $9.95 a month for the RushCard, though most will waive the fee if a direct deposit feature is set up.

Eight of the 18 issuers charged fees for not using the card for a period of time -- as much as $9.95 a month. Some even charge for customer service calls -- one charges $3 per call, another makes you pay $1 a minute.

But it's not just the fees that can sting. Consumers Union is pressing for the federal government to extend legal protections for credit cards and debit cards to prepaid cards.

"Protections for prepaid cards are not guaranteed," Jun said. "They can change their terms at any time for any reason."

While many prepaid cards offer protection in the event your card is lost or stolen and used in fraudulent transactions, they are not legally required to do so. And your money may not be insured by the Federal Deposit Insurance Corp.

Kirsten Trusko, president of the Network Branded Prepaid Card Association, said prepaid cards had gotten a bad rap.

She said they help millions of Americans who don't have a bank account or can't get a credit card. She said info about fees is disclosed and that many fees can be avoided.

"For the underbanked and unbanked users of prepaid cards, the product is a far more affordable and secure tool" than check cashing or money order services, Trusko said.

Gerri Detweiler, credit adviser for credit.com, said prepaid cards can be useful under certain circumstances, such as a parent looking to limit a child's spending.

But ideally, you should get your financial house in order so you do not have to rely on expensive options like prepaid cards, said certified financial planner Scott Brewster of Park Slope, Brooklyn.

"People get used to paying these ridiculous fees and don't realize there is a better way," he said.

For college student Robert Daniel, that $40 Whopper was an expensive lesson in the harsh realities of big-bank overdraft fees.

Daniel, 20, of West Palm Beach, unwittingly overdrew his Bank of America checking account 11 times recently. He was swiping his debit card for small purchases, including $35 for gas and $5 at Burger King.

By one estimate, Americans paid more for bank overdraft fees last year than they spent on iPods or Nikes.

"I had no idea I was in the negative, and each time I made a purchase, they charged me the overdraft fee," said Daniel, a psychology major at Florida State University. "I wouldn't have made a $5 purchase at Burger King if I'd known I was in the red. It essentially turned into a $40 Whopper."

Daniel was charged $385 in overdraft fees, plus $10 to transfer money from his savings account to his checking account to cover the overdrafts. Because the balance in his savings account was a paltry $6.50, the overdraft protection didn't stop him from bouncing payments.

Daniel asked employees at a Bank of America branch in West Palm Beach to reverse the charges. When they refused, he made a sign and spent one day last week protesting outside a Bank of America branch on South Dixie Highway.

Bank of America spokeswoman Nicole Nastacie declined to comment on Daniel's gripes, but she did say the nation's largest bank recently cut its $35 overdraft fee to $10 per item if the overdrafts in a day total $5 or less.

"This directly addresses one of our largest customer complaints and allows us to help them when they make small mistakes," Nastacie said. "We believe we are the first major bank to do this."

In cutting one fee, Bank of America is bucking a decades-long trend of ever-rising fees.

Banks and credit unions collected some $36 billion in bounced-check charges in 2008, said Mike Moebs, an economist who runs Moebs Services in Lake Bluff, Ill.

If his estimate is accurate, overdraft fees topped the annual revenue of most Fortune 500 firms - including Apple ($32 billion), Google ($22 billion) and Nike ($19 billion).

The American Bankers Association disputes Moebs' figure as too high - but bankers acknowledge that consumers pay billions a year for errant checks and careless swipes of debit cards. Those $35-a-pop charges for running a negative balance add up fast.

"The overdraft business is a huge business," Moebs said.

Once a little-noticed corner of the financial sector, overdrafts suddenly are receiving scrutiny from regulators, politicians and consumer advocates such as the U.S. Public Interest Research Group, which calls overdraft charges "tricky" and "deceptive."

U.S. Rep. Carolyn Maloney, D-N.Y., is pushing the Consumer Overdraft Protection Fair Practices Act, a measure that would limit overdraft fees.

Consumer advocates support the bill, but banks and credit unions oppose it.

As big as the overdraft numbers have grown, most consumers never pay them. A tiny percentage of bank customers run up most of the fees, and a few banks collect the lion's share of fees.

Fully 75 percent of consumers pay no overdraft charges, and another 12 percent bounce a payment only one to four times a year, according to a study last year by the Federal Deposit Insurance Corp.

It's the other 13 percent of customers who make bankers salivate.

These depositors - mainly the young, the poor, the perpetually disorganized - pay 93 percent of all overdraft fees, the FDIC says.

And just as a tiny percentage of bank customers pay most of the fees, a small percentage of banks collect most of the charges.

Bank of America alone took in nearly $11 billion in service charges on deposit accounts last year, according to FDIC data.

Wachovia and its new parent, Wells Fargo, collected a combined $5.8 billion in service charges, and JPMorgan Chase, the new owner of Washington Mutual, took in $4 billion.

Yet small banks such as Palm Beach Community Bank and First Bank of the Palm Beaches collect almost no overdraft fees. The two banks took in only $5,000 each in service charges during the first three months of the year.

It's not that the two young banks don't impose overdraft charges and other fees. Palm Beach Community Bank hits customers with a $35 overdraft charge.

But, President Cal Cearley said, his customers tend not to be the sort who overdraw their accounts. And when they do, Cearley often lives up to his sales pitch as a consumer-friendly banker by forgiving the fee.

"As a new bank starting out, we are prone to waive charges for customers," Cearley said.

Pat Cooper, president of First Bank of the Palm Beaches, calls fees a "hot button" for consumers. Low fees are a way for small banks to compete against the four behemoths - Bank of America, Wachovia, National City and Chase - that hold more than half of Palm Beach County's deposits.

"We know that Bank of America and other banks are really being aggressive in raising fees to offset some of their losses and taking advantage of a market-leading position," Cooper said.

While small banks tout low fees as a competitive edge, bank fees keep on rising. Service charges collected by banks have gone up every year since 1992, according to the FDIC.

With ever-rising bank fees joining death and taxes as one of life's certainties, it pays to shop around.

A Palm Beach Post ranking of 51 banks that do business in Palm Beach, Martin and St. Lucie counties shows that, in general, large banks collect the most fees. Bank of America and National City are near the top of the list in service charges on deposit accounts as a percentage of assets.

And small banks collect the fewest fees. Palm Beach Community Bank and First Bank of the Palm Beaches tied for the lowest amount of fees collected as a percentage of assets.

There are exceptions, however. Citibank collects relatively few fees. That's because, unlike many banks, it doesn't allow customers to overdraw their checking accounts with their debit cards.

And the unlikely leader in service charges is a small institution, Bank of Belle Glade. President Steve Prielozny said that's because of a quirk in the bank's strategy and market, not because of a focus on fees.

Prielozny said Bank of Belle Glade is one of the few small banks that offers its services to convenience stores that cash checks and sell money orders. Those type of accounts generate high fees by necessity.

What's more, Prielozny said, a few of his small business customers willingly pay overdraft fees because they find doing so more convenient than dipping into their lines of credit with the bank.

The practice isn't uncommon, despite the reality that a $35 fee on a $90 overdraft amounts to an annual interest rate of more than 1,000 percent.

Although overdraft charges sometimes nab the unsuspecting, there's also a small number of consumers who look at overdrafts as short-term loans, Moebs said.

"They expect the overdraft - they want it," he said.

Daniel, the college student, acknowledges that he has overdrawn his account on occasion in the past, but he said in those cases, "it was genuinely my mistake."

But he chafes that Bank of America was able to clear his payments from largest to smallest, guaranteeing the largest number of overdraft fees.

It's a well-known but controversial practice. Daniel said that once he resolves his dispute with Bank of America, he plans to change banks.

"I'm going to switch either to a credit union or to some form of a prepaid debit card," Daniel said.

The increasing popularity of reloadable prepaid cards, particularly among the unbanked and underbanked, has begun to raise alarms among consumer advocates who view the cards as subject to capricious pricing and lacking important protections offered on bank cards. And, as larger merchant and other enterprises become active in issuing these cards, advocates are lobbying for greater oversight. "Consumers are turning to debit and debit-like products as the economy continues to tighten, so it becomes even more important to guarantee protections," Michelle Jun, staff attorney in the San Francisco office of Yonkers, N.Y.-based Consumers Union, tells Digital Transactions News.

In a report written by Jun and issued this month by CU, the consumer group calls on the Federal Reserve to reconsider amending Regulation E to extend such protections as right of recredit and chargeback rights to reloadable prepaid cards. Common to credit and signature-based debt cards, right of recredit covers cases of unauthorized use and chargebacks refer to disputed transactions. While the Fed declined in 2004 to extend Reg E to cover prepaid cards, citing the "limited" and "short-term" nature of the accounts, Jun argues times have changed. "There have been huge strides in reloadable cards as Wal-Mart has launched and a number of other issuers have launched," she notes. "In light of that, the Fed should act."

Jun's report, "Prepaid Cards: Second-Tier Bank Account Substitutes," also faults the cards for poorly disclosed, high, and widely varying fees, arguing the total monthly cost for usage should be capped. Among 18 reloadable cards examined, the report found activation fees ranging from $3 to $99.95; monthly fees from $2.95 to $10; and dormancy fees (levied by eight of the 18) from $1.95 to $9.95 per month. These and other fees, it says, should be laid out on card carriers in a standardized fashion not unlike the so-called Schumer boxes used by credit card issuers. The report further argues that charges for overdrafts should be eliminated. The report found 10 cards charging overdraft fees ranging from $24.90 to $29.

The number of reloadable cards bearing a Visa, MasterCard, American Express, or Discover logo reached 20 million last year, estimates Mercator Advisory Group Inc., Maynard, Mass. That's up from 12 million in 2007 and 6.9 million in 2006, the firm says. Many issuers specifically target unbanked and underbanked consumers. This is a key demographic for Wal-Mart, whose 2-year-old MoneyCard is in the hands of 2 million customers.

Tim Sloane, director of the prepaid advisory service at Mercator, agrees issuers need to do more to disclose their fees. The guidelines, though, should be industry-driven rather than imposed by regulators, he says. Schumer boxes, he argues, would not work on card carriers because they require too much space. As for fees being too high, he cites a staff working paper released this week by the Federal Reserve in which the authors concluded that low- and moderate-income households in Detroit spend about 1% of annual income on transactional and credit products. "...LMI households do not always choose the most expensive financial-services option," says the working paper. "Consumers tend to be pretty sharp," says Sloane.

As for overdrafts, Sloane says these often result from consumers using prepaid cards to pay for gym memberships and other such recurring charges where costs quickly outstrip the value loaded on the cards. Issuers, he says, must assess fees to recover network and paperwork costs they incur to cover these charges. Analysts at CU, says Sloane, "ought to be a program manager for a while and get a feel for the scale of the overdraft problem."

Reg E protections are available from at least some issuers, Sloane adds. "Those cards that don't offer Reg E, stay away from them," he says. But Jun argues such protection can't be left to the caprice of individual companies, or individual customer-service representatives. "We have continuously asked the Federal Reserve Board to take a look at [extending Reg E] again," she says. "Our hope is that as more consumers are using the cards, there's no time like the present."

Why is it when you purchase something with your debit card, the money comes out of your account immediately - usually before you can even make it back to the car?

And, why is it when you return something, it takes up to three days to get a credit back?

My mom recently was shopping in Birmingham and saw a sign posted in a store that said it could take 10 days to get a refund when using a debit card.

According to AARP, when purchasing with a debit card, the card reader electronically contacts your bank and subtracts the amount from your account.

If it's this easy, why can't I receive a refund just as quickly?

Checkout lines move much faster using a debit card instead of checks. I love the convenience, especially when it comes to purchasing gas or using a self-checkout.

Using debit cards also is a good way to pay for purchases without having to pay interest, as you would if using a credit card with an outstanding balance. You can even use your debit card to get cash back when you make purchases at a store.

What's the bottom line? Since a debit card payment is just like writing a check, you should always keep track of how much money you have left in your account to avoid overdrawing the account and incurring fees.

My only complaint about using a debit card is getting refunds. If this problem were fixed, I wouldn't even bother using checks at all - except for rent, of course.

AARP offers several useful tips when it comes to debit cards:

Protect your debit card

• A debit card is like a blank check, so you need to guard the card and the account number carefully against loss or misuse.

• If your card is lost or stolen, or if someone is using it fraudulently, call your bank immediately. Follow it up with a letter.

• Thieves don't even need your card. As long as they have your name and card number, they can order goods by mail or over the telephone, even when you still have the card.

• Holding on to your debit card receipts and check them against your bank statement each month.

• Memorize your PIN but don't keep it with your card. Don't choose one that a smart thief could figure out, like your phone number or birthday. Never give your PIN to anyone.

What if your debit card is lost, stolen or misused?

• Act quickly. The most you can lose is $50 if you report to the bank or credit union that your card is lost or stolen within two days of when you discover the loss. Your liability increases to $500 if you report within 60 days after you receive your bank statement.

• If you don't to notify your bank within 60 days after you receive your bank statement, your liability is unlimited. You could lose all the money in your account. Check your bank statements carefully and promptly for charges you didn't make.

Additional withdrawals cost $1.25, money that is pulled out of the unemployment funds.

"If you use it like every other debit card, there would be no extra fees," Lotter said.

COLORADO SPRINGS - You probably will use your credit or debit card today at a business you trust, but what about the employee swiping it? Colorado Springs Police detectives say credit card skimming is on the rise in southern Colorado and you could be the next victim and not know it until you get your bill.

Colorado Springs Police tell NEWSCHANNEL 13 that three people were just convicted for skimming. Mark Nielson, Cory Skinner and Amanda Stillwell were accused of taking credit card information and then using it for shopping sprees. The team of three spent thousands of dollars and their victims were left with high credit card bills.  

Detective Wayne Lambert showed NEWSCHANNEL 13 how easy it is for someone to steal the information from your credit or debit card and create a clone card. He purchased what is known as a credit card reader on-line and then attached it to his laptop. "As you can see from your Discover Card, there are two lines of information."

Lambert says the information contains your card number, expiration date and sometimes your pin number; all vital information for a merchant to charge your bank to get the money they are owed.

The problem is that criminals can also use that information to create another credit card. "It's is a simple as highlighting, copying and looking up the proper program and sliding a blank card."  All of this can take less than a minute to create a new card for a criminal to use at the store.

The reader can be purchased online and with the other equipment to make the card a criminal can be in business for less than $800.

It's not just at the store where you have to be vigilant, the ATM or vending machine that takes your card could also have a skimmer on it. "You can place this reader on any type of machine," says Lambert. "If you're not really attentive you may not realize what happened to you and you'll swipe your card and it will store the information."

Lambert says the machine will work like normal, but two skimmers, one for the machine and the other for the criminal will get your information. "Somebody whose place it there will come by later and take it off and then download the information."

He says if you are out to eat, talk with your server and try to get to know them. If you have information on them they may not feel comfortable stealing your information. When you're at an ATM, if you see someone hanging around, avoid the machine.

Email urban myth or truth in fiction? Cash back debit cards scams and stores. Is it possible to have cash back charged to your debit card, but the money goes into the cashier's pocket? Absolutely, find out how a Target cashier was caught scamming, how my friend found out about her cash back purchase and what you can do to protect yourself.  Visiting a social networking site, a discussion was being held over paper versus plastic, and I am not talking about bags, but writing checks versus using your debit card to make purchases. The person who started the discussion was upset because someone took too much time in line writing a check for their purchase, recording the check and moving on. They thought this was "rude" and that checks should be done away with while shopping. I disagree, simply because of the dangers of using a debit card - dangers that can include cash back scams.
The other day a friend of mine sends me an email, which at first I thought was just another "forwarded" message that makes the rounds and that quite often is a scam or electronic "urban myth" that I could ignore. The funny thing about this particular message was at the bottom, she said, "No joke, I checked my receipt after shopping at Wal-Mart and the amount was $20.00 over."

What was this email about? Cash back scams. Apparently she had made a purchase at Wal-Mart and at the register was told that the do it yourself card scan was broken and the register person would "run the card" for her. After getting home and looking at the receipt to record the purchase she realized that she had been charged $20.00 too much, a charge that was seen by the use of the "cash back" label on the receipt. She contacted Wal-Mart and is happy with the resolution of the problem, however, thought she should tell others exactly how easily a cash back scam could occur.

The funny thing is she had received a forwarded message warning about the same type of scam, but Target was the store in question. She ignored it, wanting to check it out on Snopes.com but there was no need; she found out that in her circumstances it was true. I would much rather have found out that it was forwarded junk mail by a well meaning friend or family member.

Maybe this email warning regarding debit and credit card cash back on purchases has some level of truth to it. In January 2009, a Target employee was arrested for working with a friend an accomplice as a result of scamming the store for over $1,000.00. The scam was two part; first ringing up items and then doubling coupons to that the price was less (and in most cases free) and secondly using a the cashiers Target debit card and requesting cash back on a purchase, and receiving greater than the amount of the requested. For example they would do a cash back request for $20.00, but the cashier would give her accomplice $40.00. Pretty stupid when you think about it, at the end of the shift the drawer is not going to total, do that enough times and you are bound to come under suspicion.

Debit cards have become the normal method of completing a purchase while shopping both online and in brick and mortar stores. Many people, like those on the discussion board, think it's rude to use anything else. Others just like the convenience of swiping their card and being on their way. Admittedly, I use my debit card on a regular basis, because I am more likely to spend if I carry cash and I hate writing checks. It is also easy, fast and you can get cash back making a trip to the bank (and those hefty ATM charges) unnecessary. But consumers need to remember that debit cards do not have the same levels of protection against theft and fraud that credit cards do. Not all "plastics" are equal. "Debit card scams are a nightmare," warns Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group (PIRG) in Washington, D.C. "You don't get the same consumer protection as with a credit card."

According to federal law, your liability for unauthorized transactions with a credit card is limited to $50.00. But that limit only applies to a debit card if you notify the within two business days after the theft occurs. If you don't you could be charged up to $500 in unauthorized card purchases. If you fail to report the bogus charges within 60 days after your bank statement is mailed, your liability is unlimited.

So, how can we continue to have the convenience and ease of use we crave and be protected from fraud and theft?
- If a cashier offers to run your debit card for you look at your receipt immediately, make sure that no unauthorized charges are listed, especially those for cash back amounts.
- Use checks whenever possible, fill it out while in line with date and store then all you need to do is add the amount and your signature.
- When your debit card purchase is done, be sure to look at that final question . . . "is this amount correct?" and make sure that no additional cash back charges have appeared.
- Lastly, be sure to come home and check your debit card purchases online within 48 hours. Make sure the amount is as it should be and that no unauthorized charges have occurred.

Urban myth or true crime, either way, I can take a minute to look at my receipt at the end of the purchase, can you?

The NY Times had an article Wednesday decrying bank overdraft fees. While I believe much recent press coverage of the bank industry has been unjustly impugning legitimate practices, in this case I think the complaints are justified.

The interesting thing to me is that payday lenders are routinely vilified while bankers are often regarded as pillars of the community, despite the fact that standard bank overdraft practices are far less consumer-friendly than payday loans. The debate over payday lending is relevant because bank overdraft charges effectively form the umbrella under which payday lenders can function. Far more than banks care to admit, overdrafts and payday loans are substitute products. In fact, the biggest difference is that payday lenders offer consumers a better deal than banks do.

The typical payday loan costs a fee equal to 15% of the amount borrowed for a two-week loan, which equates to an APR of 391%. Borrowers must actively seek out payday loans, and the terms and conditions are all laid out immediately prior to the transaction. In contrast, the effective APR on a typical overdraft transaction can exceed 1000% (it varies by type of transaction - check/ATM/debit) and disclosure, while excellent at some institutions, is broadly far inferior to that of the payday loan industry.

The pro-overdraft fee argument is not without merit - the fees allow banks to offer free checking services to many customers, and the fees are frequently the product of customers paying insufficient attention to their finances. However, weak disclosure coupled with the common bank practice of batching each day's debits and paying them in descending order of size does tend to expose economically vulnerable customers to cascades of overdraft fees. The standard bank justification for this practice - that larger payments are more likely to be more important ones - is sometimes true but frequently not, and based on my discussions with bank managements, is much more of a fig leaf for fee-maximization strategies than a genuine reflection of concern for customers' well-being.

So what to do? I actually think the bill proposed by my Representative, Carolyn Maloney, is quite sound. It doesn't ban overdraft fees, or even cap the amount, but does require much better disclosure, including disclosure of a fee prior to approving a transaction that would incur one, and the ability to cancel the transaction instead. Critically, this would be required even for debit transactions, which tend to be smaller and thus the most costly to consumers. Her bill would also preclude banks from pursuing fee-maximization strategies, even if a more benign-sounding justification for them can be found.

As a practical matter, this might spur many banks to stop offering "free checking" and move to annual fees or much higher minimum balances, so each customer's fee load would be more closely tied to his own value as a customer, rather than being subsidized by fees paid a small subset of customers that includes a disproportionate number of low-income and unsophisticated customers.

Most banks and credit unions cover customers' checks that exceed the amount of money in their accounts and charge a "courtesy" overdraft fee. What they don't tell customers is that those fees have become a major revenue source for many financial institutions.

Since 2005, the national average for overdraft fees has jumped from $27.04 for each instance to $28.95, according to Bankrate.com. U.S. banks this year could rake in $38.5 billion in overdrafts fees, according to the research firm Moebs Services. About 75 percent of banks sign up customers automatically for the service, a Federal Deposit Insurance Corp. study reported.

For consumers, the manner in which banks handle overdraft payments can be just as important. The FDIC says about one in four banks submit large checks first during nightly processing, depleting the check-writer's account, which can trigger multiple fees for smaller checks that follow.

"You're trying to gouge the customer at that point," said one area banker who asked not to be identified.

Banks contend that overdraft protection allows customers to avoid other fees and potential criminal penalties associated with bounced checks, and the fees compensate the bank for risks involved in covering the bad checks. Consumers can opt out of the service at nearly all banks, and often can sign up for cheaper services such as automatic transfers from a linked savings account to cover insufficient funds.

But consumer advocates claim some overdraft fees and practices go too far.

Jennifer Wallis, vice president of Consumer Credit Counseling of Oklahoma, said the banks' courtesy fees "are not that courteous" when a customer writes a series of bad checks.

"Payday lenders catch a lot of flack about how high their interest rates are, but when you annualize some of these fees that banks are charging, they're as high as payday loans," Wallis said.

A bank charging a $27 fee to cover a $20 purchase made from an overdrawn account is loaning money at an annual percentage rate of 3,520 percent if paid back in two weeks, the FDIC said.

Oklahomans pay less

Each Oklahoma household with a checking account paid an average of $257.32 in overdraft fees last year, according to an analysis by Bretton Woods Inc. That's below the national average of $342.93. In 2008, Oklahomans paid $313 million in fees associated with not-sufficient-funds transactions, according to the Bretton Woods analysis.

But overdraft fees are concentrated among those who can least afford it. An FDIC survey of 39 banks found that 84 percent of insufficient fund transactions were charged to less than 10 percent of accountholders.

Lower-income customers were more likely to incur an overdraft fee and were hit more often with multiple fees, the FDIC said.

Wallis said her organization has recommended that some of its clients close their accounts and operate on a cash-only basis after being billed with repeated overdraft fees.

Arkansas-based Arvest Bank, Oklahoma's third-largest deposit holder, hasn't raised its overdraft fees in about a decade, bank spokesman Jason Kincy said. Arvest's fees, which range from $15.93 to $17.43, cover the bank's expenses related to the service, Kincy said.

"Most bank customers would be surprised to know the variation of overdraft fees," Kincy said. "When a customer is in a situation where they've incurred an overdraft fee, we're not looking at that as an opportunity to take advantage and charge as large a fee as we can."

Possible regulation?

Gary Simpson, chairman of commercial bank management at Oklahoma State University's Spears School of Business, said federal regulators may adopt new policies dealing with the ways that banks levy their fees or even the amount of fees charged.

Banks make money through interest paid on loans and through a variety of fees and investments that produce income. In a tough economic environment, noninterest income helps boost banks' bottom lines. Moebs reported that overdraft income outstripped profits last year at nearly half of U.S. banks and credits unions.

"If you look at the noninterest income of most commercial banks, the highest fee income would be on overdrafts," Simpson said.

Overdraft fees have become a "hot-button issue" for many Oklahoma community bankers, Simpson said. "It is a controversial topic," Simpson said.

"Hopefully, there can be some kind of arrangement where banks provide some type of overdraft service and consumers see it as reasonable."

Can a teen really learn how to manage their finances with a piece of plastic? Yes, if that piece of plastic is a pre-paid card or a debit card linked to a checking account.

"I love debit cards for teens," says June Walbert, a certified financial planner with USAA in San Antonio, which offers this product to its members. "It's a great tool that allows parents and their kids to track spending online. Parents can offer advice and counsel along the way as kids learn how to manage their own money."

Teen debit cards, as well as pre-paid cards, are being offered by more banks as well as online services. These types of cards give teens their first taste of electronic commerce, in an environment where parents still have supervisory control.

In the case of a debit card linked to a checking account, the bank can provide checks as well as the debit card. Deposits can be made by electronic transfer from a parent's checking account or credit card, as well as by old-fashioned deposit ticket. Pre-paid cards can be loaded in much the same manner; kids who get a regular paycheck can also set up direct deposit.

Among the banks offering accounts targeted to teens are JPMorgan Chase (JPM). Its checking account for teens with an attached debit card is called High School Checking. Parents must co-sign. Bank of America (BAC) markets the CampusEdge. Wells Fargo (WFC) has a program, as do many credit unions.

Convenience, safety and education are all factors in why parents might want to consider using these cards as a way to introduce their kids to paying with plastic.

Patrice Peyret, CEO of Plastyc, a company which offers pre-paid cards to parents and their teens via companies such as Upside Visa (upsidevisa.com), says that the card is safer than cash, and allows parents better supervision over how their kids are spending their money.

"If you give a kid cash, they could lose it," says Peyret. "If they lose the card, you can cancel it, and get a replacement. It's actually safer than cash."

And, the fact that you can monitor their expenditures online means you can discuss purchases, and whether they made wise decisions. And, for those times when only cold, hard cash will do, the card can be used at ATMs to make withdrawals.

Peyret says he hopes the cards can be used as an educational tool. "Teens go from cash they receive from their parents, to credit cards, with no intermediary in between," he says. "This is a stepping stone between cash and credit cards. The difference: it can't bring you into debt."

Walbert agrees. "Are you going to entrust kids to cook prime rib when they can't scramble eggs?" she says. "Probably not. The same thing applies to their finances. You need to teach them how to scramble eggs before they can make an omelette. Then they can graduate to prime rib."

Those steps should start early in life, says Walbert, with kids learning to save a portion of their allowance, and making purchase decisions with small amounts of money. Paying with cash makes it more real for kids, who see their parents often paying for purchases with plastic.

"Think about it from a kid's perspective," she says. "You give a plastic card to a cashier, and you get a bunch of stuff. It almost seems like you get something for nothing, so paying with cash is important."

Not many people would knowingly pay more than $35 for a cup of coffee. But far too many people are getting saddled -- with no warning -- with outsized bills for minor purchases, under a euphemistically labeled "overdraft protection program" that most major banks have adopted over the last 10 years.

Before that, most banks would simply have rejected debit transactions, without a fee, when the card holder's account was empty. Now, they approve the purchase and tack on a hefty penalty for each transaction.

Moebs Services, a research company that has conducted studies for the government as well as some banks, reported recently that banks will earn more than $38 billion this year from overdraft and bounced-check fees. Moebs also estimates that 90 percent of that amount will be paid by the poorest 10 percent of the customer base.

Federal regulators who stood idly by while this system evolved are considering new overdraft rules that could provide more transparency. If they do not move quickly and aggressively to protect consumers, Congress should step in.

Banks have historically covered bad checks for valued clients, who were invited to opt in to overdraft protection or to link their checking accounts to savings accounts or to lines of credit. But as more people began to use debit cards, the banks started to view overdraft fees as a major profit center and started to automatically enroll debit card holders into an overdraft program. Some banks instituted a tiered penalty system, charging customers steadily higher fees as the overdrafts mount.

A study by the Center for Responsible Lending, a nonpartisan research and policy group, describes what it calls the "overdraft domino effect." One college student whose bank records were analyzed by the center made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245.

Some bankers claim the system benefits debit card users, allowing them to keep spending when they are out of money. But interest rate calculations tell a different story. Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.

The banks, which have grown addicted to overdraft fees, will almost certainly resist new regulation in this area. But there are several things that federal regulators must do to protect the public.

First, banks must be barred from automatically enrolling customers in overdraft programs. This must be a service that customers opt in to -- and only after they are provided full information about the fees and the penalties they will incur. These disclosure statements must meet the same rules laid out in truth-in-lending laws, since overdraft charges are essentially short-term loans.

Banks must also be required to warn customers in real time when a debit card charge will overdraw their accounts -- and what fees they will incur if they still decide to proceed with the purchase.

This will require new technology. But there is almost no chance that the banks will invest in it unless they are legally required to do so. Until that happens, buyers beware. That cup of coffee may be even more expensive than you realize.

Credit Card Similar In Some Ways To Debit Card

Banks in the United States are poised to make $38.5 billion in customer overdraft fees this year, the Financial Times said, citing research by Moebs Services.

A large portion of the revenue is likely to come from the most financially stretched consumers, according to the paper.

It said the research showed that many banks have increased charges on overdrafts and credit cards in order to boost profits.

The median bank overdraft fee rose this year by one dollar to $26, the paper said, citing the Moebs data.

"Banks are returning to a fee-driven model and overdraft fees are the mother lode," Mike Moebs, the company's founder was quoted by the paper as saying.

Overdraft fees accounted for more than 75 percent of service fees charged on customer deposits, the paper cited Moebs as saying.

Last year the U.S. Federal Reserve approved credit card rules to curb "unfair" practices such as surprise fees and interest rate hikes, and new mortgage lending rules are expected this summer.

By: Reuters

PAUL KANGAS: Tough economic times have more consumers saying no to credit cards. A new study shows debit cards have become the preferred form of plastic in the U.S., surpassing credit card transactions for the first time ever. But as Stephanie Dhue reports, for consumers, the trend has its pluses and minuses.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Josh Clark is among the increasing number of Americans who are choosing debit over credit. He made the switch three months ago, after maxing out his credit card while starting a designer jean business.

JOSH CLARK, DEBIT CARD USER: I realized that if I put something on my credit card, I'm going to be eventually paying interest on it until I can fully repay it.

DHUE: Tight credit is also encouraging more debit card use and consumers are using it to manage their money. Clark says it helps him control spending.

CLARK: I check my bank account more frequently than I check my credit card account, so I'm more in tune with how much money I have to spend.

DHUE: As debit card use surpasses credit cards, that presents new challenges for both consumers and regulators. Debit cards come with fewer built-in protections. Consumer advocate Ed Mierzwinski warns in the case of a lost or stolen card number, the debit card holder can be on the hook for much more than if a credit card were used.

ED MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, U.S. PIRG: The maximum amount you can lose on a credit card is only $50. With a debit card, you could lose all the money in your account if you don't comply with all of the complicated rules. A credit card is protected very well; a debit card is not.

DHUE: Consumers can also get in over their heads with charges for overdrawing their accounts. The banking industry takes in $38 billion a year in overdraft fees. Banks also profit from fees charged to merchants to process debit card transactions.

MIERZWINKSI: The banks allow your debit card to work at a merchant, even when you don't have money in your account and they do that to encourage overdraft fee income, so you buy a $4 latte and it really cost you $4 plus a $35 fee, $39.00.

DHUE: The Federal Reserve and lawmakers are considering cracking down on overdraft fees. The financial services industry's Scott Talbott says the consumer plays a role in avoiding fees.

SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: Customers have to be careful to make sure they know what their balance is in their accounts and banks make it very easy to know your balance, on the telephone, ATM, even an email alert sent to your phone, checking on your blackberry, it's very easy to understand your balance.

DHUE: Josh Clark says he learned his lesson the hard way and now checks his balance often to avoid overdraft fees. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Fairfax, Virginia.

Jake Despot gets on a roll using his debit card, and before he knows it he has withdrawn more from his checking account than is really there.

The financial punishment? A "killer" overdraft fee charged by his bank.

"It's outrageous. I get dinged a smooth $30," said the 24-year-old product support technician for Braun Corp. in Winamac.

Banks nationwide are increasing their overdraft charges at a time critics say is most difficult for customers, given the recession. Banks say the fees are a way to cover the costs they incur -- such as the manual labor required to wade through the accounts -- as more and more customers become overdrawn.

The national median overdraft fee rose by a dollar from $25 to $26 in 2008, according to research company Moebs Services, which surveyed more than 2,014 banks nationwide in June. It's the first time banks have ever raised fees in a recession, Moebs says.

With the increases, U.S. banks are poised to make a record $38.5 billion in overdraft fees this year, nearly double the $19.9 billion collected in 2000, according to Moebs.

At Indianapolis' 10 largest banks, according to market share and deposits, overdraft fees range from $23 to $37.50.

Huntington, No. 4 in the Indianapolis market, charges $23 the first time a customer makes an overdraft error and $37.50 each time after. It's been more than a year since Huntington has increased its fees, but the bank does re-evaluate those charges every year or two to try to find a fair charge, said Mike Newbold, president of Huntington Bank for Indiana.

"When we look at fees, we try to balance that out for the cost-benefit equation for both the bank and the client," said Mike Newbold.

He said the first step at any of his banks is to educate customers on ways to avoid the fees, such as allowing funds for an checking overdraft to come from a related savings account or credit card.

Newbold also said paying the bank's overdraft fee allows customers to avoid a higher or double charge for a returned check.

"Clearly it's not good business, nor do we want to be in the position of taking advantage of the client," Newbold said. "And we don't. Clearly where we can save the client a little bit, we want to do that."

Nationally, overdraft fees range from $10 to $38. And while those charging the lower end of the scale are most likely covering their direct costs related to the overdraft, the higher charges are a moneymaker, said Kenneth A. Carow, associate professor of finance at Indiana University's Kelley School of Business.

"Those fees on the upper end are making a profit from the transaction," he said.

The heated issue of overdraft fees recently has reached government leaders. The Federal Reserve and other lawmakers are discussing rules about such fees, and some leading banks are willing to make concessions.

For example, JPMorgan Chase, the leading bank in the Indianapolis market, has not raised overdraft fees in at least two years, said spokesman Tom Kelly. Instead, Chase charges overdraft fees that increase with each overdrawn transaction, ranging from $25 to $35. A Bank of America spokeswoman also said the bank decided not to raise the $35 fee. Capital One and Citigroup are considering following suit as well.

Kelly said the overdraft charges are a learning experience for customers.

Perhaps after that first $25 charge, a client will step back and make changes to make sure it doesn't happen again, he said.

At Heartland Community Bank, which operates six branches in Johnson County, the overdraft fee is $31 per item.

"The majority of that $31 is offsetting that expense involved in the backroom," said Chief Executive Officer Steve Bechman. "Someone still has to manually look at that item -- whether it gets paid or returned. There is some time involved in that."

Heartland, unlike many banks, has actually seen a decrease in overdraft income.

"We discussed it among ourselves, and we think people are being more careful because they don't want to incur the overdraft charges," he said. "People are just doing a little better job of planning."

For those who don't, Heartland offers an "overdraft privilege" program.

The bank will cover up to $500 per personal account. It's protection, not a loan.

"If they make a mistake or are running tight around payroll time, it helps," he said.

Customers still are charged the $31 fee, but the bank doesn't return the check.

By Dana Hunsinger

Who do we cash checks for? This is a very common question , it is a wide variety of sutuations that will bring a customer through the door .. People who choose not to use a traditional bank, if you do not have enough money in your bank to cover your check, if you do not have a bank account,  if you owe your bank money and cannot pay them that day, if you live check to check, if your address on your ID is not current, if you have a expired ID , and the list go's on and on . We are a alternative financial operation that offers a wide variety of financial services  , this make us a viable options for people who choose not use the mainstream approach . Check Cashing stores, or Your Exchange Check cashing is a premier alternative financial solution , they offer a wide variety of services that traditional banks do not offer .. These services include Prepaid debit card , payroll cards, direct utility payments, fax service, wire transfer services, and much more .. Visit www.your-exchange.com for more information    

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