JIM LEHRER: Now, Jeffrey Brown has the latest on changes ahead for debit cards and the companies that issue them.
JEFFREY BROWN: When you use that debit card in your wallet — and more of us are doing that — what are you agreeing to? What happens, for example, if you use it to spend more than you realize you have in your checking account?
Consumer groups and now some legislators have been up in arms about banks charging so-called overdraft fees that can amount to far more than the overdraft itself and can be assessed numerous times.
Today, two of the nation’s biggest banks, Bank of America and JPMorgan Chase, announced they would revise their policies on these fees. Here to tell us more is Ron Lieber. He’s the personal finance reporter for the New York Times and writes the paper’s “Your Money” column.
Ron, let’s start with the problem. Explain how the overdraft fees work.
RON LIEBER: Well, the way the banks refer to this as overdraft protection and it happens automatically in many cases and consumers often don’t realize that they have it. It may have been part of the fine print when they signed up for their accounts.
But the way that it works is if, if you spend more than you have in your bank account, the bank may automatically cover you and allow the transaction to go through, whether it’s a debit card transaction you make at a store or an ATM transaction you make at the ATM machine, a withdrawal, or even with a bounced check.
And so what will happen then is that the purchase will, in fact, go through, the transaction will go through, but then you’ll get charged a fee, say, $30 or $35. And for as long as you are overdrawn, as long as you’re spending below zero, you’ll get hit with a fee every single time you make a transaction until you make a deposit of some sort and your account is above zero again.
JEFFREY BROWN: All right, so that clearly raised a lot of hackles from consumers and some in Congress. What have the banks agreed to do?
Taking control of overdraft fees
RON LIEBER: Well, one of the things that was going on with the banks is that, even when consumers discovered that they had this coverage, some of them, when they went to their banks and tried to get it turned off, the banks would say, "No, actually, we're not able to do that for you. The overdraft coverage is automatic."
And what has changed just in the last day or so is that Bank of America and Chase and now Wells Fargo, too, have announced that they will let consumers go to the bank and raise their hand and say, "Hey, I don't want to be a part of this coverage anymore. I don't want you to, in effect, protect me from myself. And so if my account is going to dip below zero because of a transaction, I want you to decline it instead of letting it go through and charging me a fee."
JEFFREY BROWN: Wells Fargo just joined in this afternoon. Is that what happened?
RON LIEBER: That's right. They just joined this afternoon, in effect, following what Bank of America and Chase announced this morning.
JEFFREY BROWN: Now, I can hear people out there listening to this, and I would imagine perhaps it's the bank's argument is, hey, aren't people supposed to know how much they have in their account? And aren't they supposed to be responsible for not trying to use their debit card when they don't have that much money in the account?
Is that what the banks have said in the past in favor of allowing them to charge this?
RON LIEBER: Sure. I mean, it is a convenience fee, right? I mean, the bank is providing a service. It's covering a payment for you. And, you know, by all accounts -- I mean, nobody argues with the fact that people should keep track of what they're spending.
But for those who don't or for those who slip for whatever reason or for those who make an error, those people argue, "Well, I'd like to know that I have this coverage. And, moreover, I'd like to be able to turn it off if I do have it or at least have the choice to do so."
And so that way people have the opportunity to say -- to weigh all the fees involved and the potential benefits and to raise their hand and take some affirmative action and say, "Yes, I would like to be included in this coverage," or, "No, I do not want to have it."
And in the past, it wasn't always clear to consumers whether they had it and, if they did have it, they couldn't necessarily turn it off.
JEFFREY BROWN: The larger context here, of course, is this huge growth in the use of these debit cards and also how they're marketed to us, right?
Explosion of debit card use
RON LIEBER: Right. Well, one of the things that's happened, you know, over the last several years is that the number of debit card transactions themselves have exploded for a variety of reasons, I mean, often because people like to use these cards as budgeting tools. You can track what you spend on a sort of minute-to-minute, day-to-day basis, and presumably the card would not let you spend more than you had. The idea was is that, you know, you could see your budget and your balance in real time and not spend more than you have.
But what the banks realized is that they could make an awful lot of money -- in fact, you know, tens of billions of dollars per year, it turns out -- by letting transaction go through when people don't have enough money but then charging people for that privilege.
JEFFREY BROWN: So in a sense, the debit card is functioning a bit more like a credit card, if you can go past zero, I mean?
RON LIEBER: It does, in fact, function more like a credit card, because the bank, after all, is extending credit. You know, the bank won't cover your overdraft in every circumstance, but it will do it a lot, and it will do it until you go way far below zero, at which point, you know, different banks will cut you off at different moments. So they are, in fact, extending you credit.
The problem is that this service isn't covered by the various laws that govern credit cards and extension of credit generally, because if it was, you would need to know what interest rate you were being charged. And the problem there is that, if you're paying a $35 overdraft fee because you've gone, you know, $10 below zero, and you're only there for a day or two, say, if they had to tell you what that interest rate was the equivalent to, it might be in the 1,000s of percent, at which point you might not want that service anymore.
Source of income for banks
JEFFREY BROWN: Now, you mentioned the banks taking in tens of billions of dollars, kind of astounding. This has become a very important source of income for them, I guess, especially in hard recent times. So what happens now? I mean, you mentioned Wells Fargo joining in. Do you think other banks are going to? Do you think that the regulation or legislation goes forward from here?
RON LIEBER: Well, it's going to be interesting to see what happens, both from a consumer behavior perspective and from a legislator behavior perspective. On the consumer side, banks have always said that this is a service, it's a privilege, it's something that users value, and now we're going to see a test of that, because it's going to be clear, especially people who are signing up for new bank accounts for the first time, it will be clear to them that they have an opportunity to check a box and say, "Yes, I want this," or to decline the coverage. It will be very interesting in a year or two to see how many people have done that and the extent to which fee revenue has gone done.
Now, as far as the legislators are concerned, they've already come out in the last, you know, day, since Chase and BofA made their announcements, and said they intend to continue pressing forward with the legislation to make sure that every bank falls in line and not just, you know, some of the big ones that feel a sort of competitive pressure to do so.
So we'll see where that goes. I mean, once the legislation is introduced, then it has to pass, obviously, and, you know, we'll see where that goes in the coming months.
JEFFREY BROWN: All right, Rob Lieber of the New York Times, thanks very much.
RON LIEBER: Thank you.