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The rising cost of banking

MICHAEL COIT
THE PRESS DEMOCRAT

If you don't pay attention to the small print on your checking account, it could cost you big.

Banks are raising fees on everything from ATMs to overdrafts, looking for new sources of revenue to make up for losses on troubled loans and soured investments.

For consumers, it is easier than ever to overdraw your checking account, racking up costly charges. With a swipe of a debit card, a $3 latte can quickly become a $30 latte if you don't have the cash in your account.

"People are behind and this is one of the things that is pushing them farther behind. It's another belt tightening. It's another frustration," said Jeannine Moore, spokeswoman for the Consumer Credit Counseling Service, with offices in Santa Rosa.

Large national banks have been much more aggressive than regional and community banks about raising fees and enforcing them, according to Moebs Services, a research company that tracks banks and credit unions.

But banks and credit unions, large and small alike, are raising fees.

For example:

-- Consumers paid an average $3.43 surcharge for using another bank's ATM, a 13 percent increase over a year earlier, according to a Bankrate.com study at the end of 2008.

-- Stopping payment on a check now costs $25, a 25 percent increase over a year ago, according to Moebs Services.

-- Overdraft fees are $26, a 4 percent increase from a year ago, and up 18 percent from five years ago, according to Moebs.

The increases have surprised analysts. In the past, banks and credit unions have been reluctant to raise fees during economic downturns, said Mike Moebs, who founded his Lake Bluff, Ill., firm in 1983, and provides research for banks, credit unions and government agencies.

"What we have not seen is increases in a recession," Moebs said. "Banks and credit unions are loath to increase their fees because it hurts consumers and small business and that can hurt business."

Bank officials contend the fee increases cover rising costs to provide those services. Further, they said consumers can avoid many fees by changing behaviors, like budgeting their money better.

Exchange Bank, the largest based in Sonoma County, recently raised several fees that had not changed in at least two years, said Craig Van Selow, vice president of retail banking.

"We review our fees regularly. Our fees reflect the market and our cost of doing business," Van Selow said. "Our fees certainly had become competitively low. We made a cautious increase."

Redwood Credit Union recently raised its overdraft fee to $22 from $20, but it is only up from $18 a decade ago, said spokeswoman Robin McKenzie. Most other fees to recover costs of service have not been increased in the past decade, she said.

"Redwood Credit Union reviews our fees annually. Across the board fee increases is not our practice," McKenzie said.

While the increases are relatively small, the cost to consumers can quickly add up.

Steeper overdraft fees have drawn increasing attention from consumer advocates and Congress as banks have made it easier to rack up such debt.

"The real revenue generators are overdraft and insufficient funds fees. It used to be considered a bad thing," said Jean Ann Fox, financial services director for the Consumer Federation of America.

Traditional overdraft protection programs have long allowed customers to tap funds in other accounts to avoid overdraft fees.

In the past, customers who did not sign up for this service would see their checks and debit card transactions rejected when their accounts were overdrawn. But increasingly, banks are automatically paying these transactions. Rather than rejecting them for insufficient funds, banks will continue to make payments -- and charge the customer a fee each time.

Under these so-called courtesy payment programs, the typical customer can overdraw their account by $100 to $1,000 before banks start to reject transactions, according to consumer advocates.

About three-fourths of the nation's banks automatically enroll customers in such automated overdraft programs, and customers must ask to be removed. Both Exchange Bank and Redwood Credit Union have versions.

"I believe the financial services industry has become a little more comfortable with the risk of low-level overdrafts. Banks have over time realized that people make mistakes, and if you choose to not use your account carefully and pay for those services, that doesn't make you a bad customer," Van Selow said. "If we believe you are exposing the bank to a loss that we cannot readily recover, we're going to stop paying."

The problem has grown as debit card use has become more common. Many consumers now use debit cards instead of cash for small transactions, pulling them out of their wallets several times each day to purchase everything from a cup of coffee to a tank of gas. Most bank customers assume they cannot complete such a transaction without funds to pay for them, consumer advocates said.

"Essentially it's a high-cost loan given to folks who may not need them or want them," said Ginna Green, a spokeswoman for the Center for Responsible Lending.

Banks have crafted policies to increase their ability to collect overdraft fees. For example, some major banks choose to process large transactions first when multiple withdrawals occur. That way, the account is emptied faster and the bank can impose overdraft fees on each of the smaller transactions, Green said.

Most consumers would rather have the option to back out of a purchase rather than pay automatic overdraft fees, Green said.

"Someone who knows they're buying a $3 latte and the debit card machine says you don't have enough money to cover this transaction, most people are going to get a cup of coffee at home," she said.

Requiring banks to get customer approval to enroll in automated overdraft programs is one proposal before Congress. Another measure would require banks warn customers when a transaction will result in an overdraft.

Consumers can avoid overdrafts by keeping a closer watch on their money, bank officials said.

"They have more access to current account information than they ever have before and our experience is they are using it," McKenzie said. "We find that a lot of our members are going online a lot, calling our phone center."

Still, debit cards made it easier for Santa Rosa resident John Heglin and his former wife to lose track of funds in their account. He said living paycheck to paycheck made it easier to fall behind.

"Once you get behind you never catch up," Heglin said.

A construction worker, Heglin said he has been working to improve his credit record for three years.

"The overdraft fees are what got me in trouble in the first place. They buried us," he said. "I would pay it off, but then there were late fees. And they're getting interest off the late fees."

Now he has lost his checking account and it costs him $5 to cash a check at Exchange Bank -- another new fee -- even when he goes to the branch that issued the check.

While rising overdraft fees have drawn the greatest attention, banks are hiking other charges, as well as cutting costs, to make up for revenue losses in other areas, Moebs said.

Bank balance sheets have been hit by loan and investment losses. At the same time, interest rates charged on new loans are near historic lows, yet banks are paying competitive interest rates on deposits to keep and attract customers, Moebs said.

"The banks and credit unions are hurting so badly on their asset side that they have to increase prices where they can and much of that is in the area of fees, and they cut their expenses, which they have," he said.

Exchange Bank's recent fee increases were not connected to any loan losses or other hits to earnings, Van Selow said.

"It's absolutely coincidental," he said. "Our fee practices are completely separate from our lending practices during the current economy."

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