January 2010 Archives

Jan. 12 (Bloomberg) -- Toronto-Dominion Bank's U.S. retail unit was accused of gouging debit card holders by charging "abusive" loan fees on overdrawn accounts, according to a lawsuit by a New Jersey customer.

TD Bank NA processes debit card transactions that exceed available balances on accounts and provides "courtesy" overdraft loans without notifying customers that they are overdrawn, according to the complaint filed yesterday in federal court in Camden, New Jersey.

"TD Bank is turning these overdraft 'loan fees' into an enormous profit center by manipulating the debit-clearing process so that its customers get caught paying substantially more fees than necessary," according to the complaint, which seeks to proceed as a group, or class-action, lawsuit.

Toronto-Dominion Bank is Canada's second-largest bank. It spent more than $15 billion to expand in the U.S., including the acquisitions of Portland, Maine-based TD Banknorth and Cherry Hill, New Jersey-based Commerce Bancorp Inc.

"We believe our methods of handling our customers' transactions are both fair and legal," Rebecca Acevedo, a spokeswoman for the Toronto-based bank, said in an e-mailed statement. "Since the suit was just filed, it would be premature to discuss it at this time."

Customer Donald Kimenker claims in his complaint that TD Bank "deceptively reorders" an account's debit card transactions in its computers to maximize overdraft fees. Such fees are processed from highest dollar amount to lowest, rather than in chronological order of purchases, according to the complaint.

Overdraft Fees

"Charging the largest debits against available funds ahead of smaller debits results in more overdraft fees, as available funds decrease faster than they would otherwise, thereby generating hundreds of millions of dollars in additional overdraft fees for TD Bank," according to the complaint.

Kimenker claims that a customer with $1,150 in an account who makes six debit transactions totaling $180 and then writes a $1,100 rent check would have overdrawn her account by $130. Rather than charging a single $35 overdraft fee on the rent check, TD Bank processes the rent check and then charges five separate $35 fees for a total of $175, according to the complaint.

The bank "will make every effort to ensure a customer can complete his or her transaction," Acevedo said in her e-mailed statement. "TD Bank will accommodate the overdraft so our customers avoid the embarrassment and hassle of having their transaction publicly refused."

Deduction Order

She said that deposits are applied first to accounts, and then debits are deducted "in order from largest to smallest amount," to ensure that "larger (and usually more important) items like a mortgage are paid first."

The bank also gives customers the option of opting out of the overdraft program, she said.

The complaint alleges that TD Bank engaged in fraud, breach of contract and unjust enrichment, and that it violated the New Jersey Consumer Fraud Act. It seeks unspecified compensatory and punitive damages.

While converting some of its U.S. branches at the end of September onto a single platform, some clients were delayed in processing transactions because of a technical issue. The bank told investors in December that the problems had ended.

The case is Donald Kimenker v. TD Bank NA, 10-cv-136, U.S. District Court, District of New Jersey (Camden).

Banks are cutting overdraft fees, but there are other hidden charges.

In the wake of the uproar over bank fees charged to debit card holders--and the looming threat of congressional action--banking giants Bank of America and JPMorgan Chase announced Tuesday drastic changes to their overdraft policies.

What banking customers might be missing is that debit card overdraft fees are the tip of the iceberg. Banks nickel and dime their customers in numerous other ways that can easily cost the average person $100 or more per year. Adding insult, many of the fees are poorly disclosed and levied regardless of any action the customer does--or doesn't--take. del.icio.us

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"There is a long list of fees that people pay that doesn't require any type of acknowledgment on the part of the consumer," said Greg McBride, a senior financial analyst at Bankrate.com. Here are five major areas of hidden bank revenues.

Balance transfer fees. Banks commonly mail out ads pitching low interest rates for customers willing to transfer credit card balances from another institution. What many don't advertise is that there is often a balance transfer fee of between 3% and 5% hidden in the fine print.

"If you're transferring a balance from a card with a rate of 15% to a card with a rate or 13%, but you're paying a 3% admission fee, you're not saving any money," McBride said. Moving a balance of $5,000 from one credit card to another with a slightly lower interest rate could result in a $150 charge being added to the balance that you owe and pay interest on.

If you're thinking about switching to a card with a lower interest rate, ask the bank what type of transfer fees it charges. These fees are separate from the annual interest rate that you pay.

Cash Advances. Consumers who take cash advances from their credit cards will also be hit with a transaction fee that they might not have been expecting. As with balance transfers, cash advances often come with a fee that ranges between 3% and 5%. That's not all.

"If cash advances weren't costly enough with interest rates in the high teens, there's no grace period, and the interest clock starts ticking right away," McBride said.

Foreign Currency Surcharges. Using a debit or credit card while traveling overseas is wonderfully convenient. Perhaps too convenient. Over the past few years, banks have commonly started charging a 3% fee for any purchases made in foreign currencies. That means if you go to Paris on vacation and buy presents in euros, the charges will show up on your statement in dollars--with the 3% fees built in.

If you plan to use a debit or credit card abroad, consider opening an account with Capital One ( COF - news - people ) or Charles Schwab ( SCHW - news - people ), whose foreign currency exchange fees run as low as 1%. If you are going to be taking money out of an ATM in another country (another place where banks ring up additional charges), Wells Fargo ( WFC - news - people ) and PNC ( PNC - news - people ) offer some of the lowest fees.

Balance Requirements. Many banks offer to waive monthly service fees on checking or savings accounts if customers maintain a collective balance above a set minimum. Dip below it, and you could be hit with a charge of $8 or more every time your balance falls below the minimum.

"These requirements are really a lose-lose proposition," McBride says. "If you don't maintain the balance, you get socked with a fee. If you do maintain it, you have the opportunity costs of stranding money in a low-yielding account when you could be earning a more competitive return in an online savings account."

ATM Fees. Bank of America ( BAC - news - people ) and other banks now charge customers from other banks $3 to withdraw money from its ATMs. But at least you have to agree to pay the fee at the terminal. What some customers may not realize that is that their own bank often levies a $2 fee every time they use a competitor's ATM as well. Adding up all the bank fees, it may cost $5 to take out $20 of your own money. That's a 25% commission, and the bank didn't have to do a thing.

The unbanked and underbanked consumer segments are under increasing scrutiny to understand what they want and need in prepaid card products. In a December 2009 impact note entitled Prepaid Debit Cards: Barriers to Adoption, payments industry advisory Aite Group LLC analyzed why some consumers choose prepaid cards while others do not.

In November and December 2008, Aite surveyed 400 frequenters of eight check cashing stores in urban and rural communities in Virginia. For the purposes of its research, Aite delineated checking account holders (underbanked) from those that lacked checking accounts (unbanked). Aite then segmented respondents into five categories: adopters, rejectors, unreached prospects, purchase intenders and lapsed owners.

This segment represented 30 percent of respondents. Aite found that adopters have embraced prepaid cards; not only do they try them but they reload them as well. According to Judy Fishman, Aite Analyst and co-author of the report, adopters consider themselves technologically savvy and willing to try new things. Consequently, they have incorporated prepaid cards into their lives.

Unlike adopters, rejectors have no interest in prepaid cards; because they make up 43 percent of Aite's research, prepaid providers might take heed regarding why.

"They feel the cards are either a problem or a mystery," Fishman said. "And they know about them. They know they're there. But at this moment in time, they don't have any interest in trying them." Fishman attributed rejectors' reticence to a lack of technological sophistication, as opposed to lack of education. "I think the adopters are more willing to use products that are a little higher up in the hierarchy of complexity," she said.

Fishman advises providers to reach rejectors by conveying to them clearly and concisely the benefits of prepaid cards, such as that they are safer to carry than cash. "And in what ways does it give them an opportunity to participate in channels that are currently not available to them if they rely fully on cash or money orders," she said. Unreached Prospects Seventeen percent of research participants were put in the unreached prospects category. These consumers are unaware of prepaid cards and tend to be both younger (25 and under) and older (over 45) than adopters. They are more involved with technology than rejectors but prefer to pay with cash.

According to Fishman, for the younger unreached prospects, the idea of a prepaid debit card has not sunk in; for the older consumers, debit cards are a newer product and have yet to recognize prepaid cards as a natural extension to them.

The report recommends mass marketing and in-store demonstrations as ways to familiarize unreached prospects with prepaid cards.

The other two categories, purchase intenders (5 percent) and lapsed owners (4 percent) were not analyzed in the report because these groups are small and "appear to be already sensitive to the product [and] would be apt to be caught in a broad category," Fishman said.

She recommends that prepaid card providers continue to reinforce brand and product adoption, as well as the reloading of the cards by adopters.

Additionally, providers should focus on convincing unreached prospects to try prepaid cards by providing them simple and relevant information.

The nation's banks will be bombarding customers with new fees and products in 2010 as they try to replace more than $50 billion in revenue wiped out by new rules that clamp down on certain business practices.

So far, the changes are mostly concentrated in checking accounts and credit cards. In addition to attaching new fees to old products, banks are introducing new types of accounts that they hope will reel in new customers and reduce their funding costs.

For plastic, the new rules go into effect in February as part of the Credit Card Act of 2009. The rules will limit some interest-rate increases, require more disclosure to customers and prohibit banks from raising interest rates on current balances unless a customer is at least 60 days behind in a payment.

Credit-card issuers collected $22.9 billion in penalty fees--such as those assessed for late payments--in 2009, up from $19 billion in 2008, said Robert Hammer, who runs a credit-card consulting firm in Thousand Oaks, Calif.

Credit-card companies already have been racing to slip new fees and practices into customer contracts ahead of the law. Issuers are closing accounts, switching cards with fixed interest rates to variable rates and introducing cards that have an annual fee.

Christopher Moss, who regularly shops at sporting-goods chain Gander Mountain, recently was notified that he will be charged a $1 "processing fee" each time he receives a printed statement of his Gander credit-card account rather than an electronic one. The 50-year-old paralegal said he is prepared to cut up the credit card even though he likes the loyalty rewards that come with it.

"It's not like I can't afford it, but it's another little stick in the consumer's eye," Mr. Moss said.

The Gander Mountain card is issued by World Financial Network National Bank, a unit of Alliance Data Systems Corp., of Dallas. The company, which also issues credit cards for women's clothing chain Ann Taylor Stores and lingerie maker Victoria's Secret, says that the decision to charge the fee is partly tied to the costs that it will incur from the new rules.

"One requirement of the Credit Card Act of 2009 is that monthly billing statements will now have to include significantly more information pertaining to the cardholder's terms and conditions, thus increasing the amount of paper, production and postal expenses as well as having a greater environmental impact," the company said in a written statement.

Issuers also are likely to water down rewards programs and introduce fees for inactive accounts. "There are so many things that issuers can do that the Card Act doesn't touch," said Bill Hardekopf, chief executive officer of LowCards.com, a Web site that tracks the industry.

In addition to the credit-card rules, the government will crack down next year on ways banks charge overdraft fees, which are assessed when a customer overdraws an account.