As if 17.5 billion dollars in overdraft fees was not enough for the banking industry last year, many of the major banks are raising their fees to further penalize consumers for making a mistake.

USA Today obtained some internal memos from Wachovia that tells the disturbing inside story of business first and customers second.

According to these memos, Wachovia has been urging its employees not to refund too many overdraft fees because they “make up a big percentage of our revenue and is a HOT button among leadership (read: bank management).”

What’s more disturbing is that Wachovia told their employees to “sell” a debit card to their customers due to the money that the bank makes.

Bank of America has raised their overdraft fees by 25%.  They also have raised the number of times a customer can be hit with the fee on a daily basis from 5 times a day to 7.  According to USA Today, they also put new policies in place where a penalty fee is immediately assessed if the account goes into overdraft by use of a debit card.

Prior to these new policies, a Bank of America customer had until the end of the day to make a deposit to cover the lack of funds.  This is no longer the case.  This just creates more opportunity for BOA to collect penalties.

In an USA Today article written earlier this year, Center for Responsible Lending Director Eric Halperin said, “Every year, check use is dropping.  Banks that rely on overdraft fees know the only way they can continue to generate these fees is to let people overdraw on debit cards.”

The study conducted by the Center released this year states some pretty disturbing findings.  The following is an excerpt from the executive summary:

“Recent growth in overdraft fees has been fueled by unfair practices that include (1) posting charges against a checking account quickly while intentionally delaying the posting of deposits, (2) lowering account balances by re-ordering debits to clear higher-dollar items first, and (3) failing to warn a customer during debit card point-of-sale or ATM transactions if they are about to overdraw their account, so that they may cancel the transaction if they choose.”

So, let’s look at a scenario using Bank of America as an example.  A customer walks into Bank of America to open up an account.  The representative from Bank of America goes through the account details and issues a debit card.  They tell the customer that they are also going to add overdraft protection.  If the customer does overdraft due to a debit card or check purchase, the charge will go through and no embarrassment takes place.

Then they sign the customer up for the Keep the Change program.  This is an opportunity for the customer to be involved in a program that will keep the customer’s bank account in a constant state of flux as Bank of America moves random amounts of money from their checking account to their savings account.

The debit card is one of the biggest reasons people overdraft because it is used for small purchase.  A consumer can charge a $1 hamburger at McDonalds, overdraft by $0.02 and end up paying $30 for that $1 burger.  In addition, debit cards are just not tracked as closely in a check register.

Let’s say that the customer has $100 in their bank account.  The customer thinks that there is more available cash.  Unfortunately, the customer is wrong.  A deposit that he thought was made never happened.  So he starts out with purchase #1 and spends $101.  He gets hit with a $25 overdraft first thing that morning.  Then he buys gas, goes to the grocery store, picks up a prescription, eats lunch, picks up something at the sporting goods store, and then picks up coffee at Starbucks.  He used the debit card for everything.

Now he is penalized for 7 debit card transactions and owes Bank of America $175 in penalties. Hopefully, he will figure it out before he uses it a second day where that $2 cup of Starbucks coffee will cost him $27 after the overdraft fee is assessed.

Here is the reality – the big banks are in trouble due to all of the mortgage loan losses and are getting as creative as possible to raise money.  Unfortunately, that usually means traps for the consumer.

I don’t have a problem with overdraft fees when a person makes a mistake.  I do have a problem with bank strategies that appear to be designed to increase the possibility of overdraft fees.

Moral of the story:

• Be careful with programs that banks are promoting that are marketed as being in the consumer’s best interest and have a debit card as the focal point of the program
• Watch your bank account carefully
• Don’t use debit cards – they do nothing for your credit and they have a greater liability for identity theft than credit cards.  You are only potentially doing the bank a favor in using a debit card.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.