You didn't think banks would forgo billions of dollars in overdraft fee revenue without a fight, did you?

As an Aug. 15 congressionally imposed deadline approaches to stop collecting fees for most debit card-related overdrafts, banks are blanketing account holders with pitches designed to entice them back into the costly programs. Consumers are seeing pop-up ads when they log in to their online banking accounts and getting paper notices in the mail. Some are even getting pitched at bank branches or ATMs.

The enticements hawk rebranded overdraft coverage with varied names -- "courtesy pay," "Buffer Zone," "debit card advance," or simply "debit card overdraft coverage." But most of the pitches evoke the same logic: "If you want your account to continue to work as it does today, you will need to let us know," as one Chase ad says.

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Banks currently often allow consumers to spend money they don't have in their checking accounts through a swipe of their debit card in a store or through an ATM withdrawal. Then they charge consumers about $35 for each transaction that exceeds their account balance.  New Federal Reserve will require banks to decline those transactions as of Aug. 15 unless consumers have "opted-in" for overdraft coverage.

The new rules do not apply to paper checks or other forms of electronic payments.

Fearing a sharp loss in revenue, banks are making a hard sell to consumers to protect as much of that income as possible.

"NO FEE to keep Courtesy Pay Overdraft Protection coverage on your account. NO FEE if you never use it," brags a solicitation from the Arizona State Credit Union.

Some banks are even taking the opportunity to create new products, such as Citizens Bank's "BufferZone." According to a description of a bank brochure provided to msnbc.com by Jean Ann Fox of the Consumer Federation of America, consumers can pay $4.99 per month to buy a $30 "buffer" on their checking accounts.

"That means overdrafts will be paid and the overdraft fees waived as long as the overdrawn balance does not exceed the $30 buffer," the brochure says. "Keep small misses small.  Sometimes it happens:  your account is overdrawn by a couple of dollars, or even just a few cents.  With BufferZone you can rest easy knowing that your small misses will stay small."

If you doubt the importance of the change, a visit to banking consultant Acton Marketing's Web site will probably change your mind.  The site, which hosts a countdown clock that is ticking down the seconds to Aug. 15, brags that its marketing materials will help persuade "stubborn" consumers to opt-in.

Various estimates suggest that banks stand to lose between $10 billion and $15 billion in annual overdraft revenue from the change. Chase alone says it will lose $700 million in fee-based revenue this year.

As banks scramble to sign up as many consumers as possible, consumer advocates are crying foul. They charge that the banks' ads are misleading and that many are failing to clearly tell consumers they have far less expensive options for  debit card overdrafts.

"The choice is between paying nothing and paying what they are charging," Fox said. "But we are starting to hear from people being asked (to sign up for overdraft coverage) over and over and over, every time they log in."

'If you don't do anything you won't pay anything'
Lauren Bowne, a staff attorney at Consumers Union, says the fact that any consumers have opted in to bank overdraft programs suggests the ads are misleading.

"If you don't do anything you won't pay anything. That's what all banks fail to say," she said.  "Who knows what people are being told and why they are opting in."

It's hard to conjure up a scenario where overdraft coverage is a sensible way to cover a short-term cash shortfall, and the Consumer Federation of America recommends that account holders simply ditch the bank pitches.  Still, there are some indications that marketing materials are working.

A survey by research firm The Nielsen Co. released in June found that 26 percent of consumers intended to opt in, and another 39 percent were undecided. An anonymous executive quoted in the American Banker last month said that 60 percent of consumers opt in when told their cash withdrawal requests will otherwise be denied at an ATM. And a reader who told Consumerist.com that he was a bank employee, claimed last month that 19 out of 20 account holders consent to opt in when pitched directly by a bank teller.

"All you have to do to get an almost definite yes is explain that opting in will keep their account exactly the way it is now. People are scared of change so they'll opt in to avoid change," he wrote.

'Do you want to pay 18 percent, or 120 percent, or 900 percent?'
The problem, Fox says, is that consumers aren't getting enough information to make an informed choice about the overdraft coverage. For years, consumer groups have argued that automatic overdraft coverage is a short-term loan, and should be covered by the Truth in Lending Act. If it were, many overdraft fees would be computed at 900 percent annual interest or more, and that rate would be included in all marketing materials.  By that measure, other sources of short-term funding -- even many credit card cash advances -- would be cheaper. In fact, most consumers would be better off using a different product already offered by their bank.

"Banks need to spell this out in a clear format, " Fox said. "We have recommended that (the Fed) require banks to present the information in clear tabular format so, consumers see what all their options are and what they cost. When they say, 'Let us continue to cover your overdrafts, they're not giving you the cost information.  It should say, do you want to pay 18 percent, or 120 percent, or 900 percent ?'"

A collection of Consumer groups took on Chase earlier this year when it sent out mailers that they said were intentionally confusing and failed to mention the $34 fee that consumer would pay for overdrafts if they opted in to Chase's overdraft coverage.

"The initial solicitation used scare tactics," said the Consumer Union's Bowne. It implied that consumers would lose rights and their debit cards would no longer work the same way if they didn't opt in, she said.

Chase altered its pitch materials, following some of the consumer groups' recommendations.

"Our goal with this process is to let consumers know there's a change coming, and encourage them to make an informed decision," said Chase spokesman Tom Kelly. He would not say how many account holders had signed up for the coverage. He described Chase's debit card overdraft coverage as part of "triple protection" consumers can have against overdrawing their accounts, along with other overdraft tools such as a linked savings account and text message alerts about low balances.

Not everyone is being inundated with opt-in ads, Bowne said. She said banks are specifically targeting consumers who she says can least afford it: account holders who have a chronically low balance. Marketing materials at Acton seem to support that claim.

"What you need to do to acquire the highest number of opt-ins, especially from the most important group — the regular NSF (non-sufficient funds) users," the firm says on its Web site.

Not all banks are joining the opt-in marketing party. Bank of America has already changed its overdraft policy and simply will not let consumers overdraw their accounts through debit card purchases. Other banks, such as like USAA Federal Savings Bank, have never allowed such overdrafts.

But the easy money is too hard for many institutions to pass up.  When a consumer with a low balance swipes a debit card to pay for a transaction that would throw their account in the red, banks that don't allow the purchase lose two revenue streams: the potential overdraft fees and the interchange fee collected from the merchant for performing the transaction.  if consumers get in the habit of pulling out another bank's credit card for transactions like these, debit-card issuing banks stand to lose millions in interchange fees, too.

Banks can continue to sign up customers after Aug. 15, so while account holders should expect a crescendo of overdraft protection marketing pitches in the next few weeks, they will continue for months.

"This whole monster has kept growing and growing since we first ran across it," Fox said.  "It's not going away. … There's billions of dollars on the table."

Red Tape Wrestling Tips
It's always important to have a financial plan B. Many folks never think they'll face a negative account balance, yet by some estimates one in three account holders paid at least one overdraft fee last year. Even if you aren't at risk today, now is the time to prepare for a financial slipup.

But there is massive confusion over the best way to do that. You can decide if that's intentional or accidental, but let me sort it out for you.

The short answer: There is no reason for the vast majority of people to opt in for courtesy pay or whatever else it's called. The good news is, the default choice is the right choice, so you don't have to do anything. If you have already opted-in, the bank must allow you to opt back out, and you should.

But you should also find another plan B, and that's where the confusion comes in.

There is good overdraft coverage, and evil overdraft coverage.  With good coverage, you are borrowing your own money, which is relatively cheap. With "courtesy pay" or "automatic overdraft coverage" you are borrowing the bank's money, which is very costly.

There are three easy ways to provide good overdraft protection:  You can link a savings account, credit card or line of credit to your checking account. Once you do, if you bounce a check or exceed your balance with a purchase, the money will be dragged from your savings, credit card or line of credit into your checking account to cover the balance.

There is a cost involved. Chase charges $10 for each automatic transfer from savings to checking, for example.  But that's still quite a bit cheaper than $35. Also, courtesy pay can result in multiple $35 charges for separate transactions on the same day, while linked accounts lead to only a single charge for each day.

Also, it's important to note that courtesy pay isn't guaranteed. Banks cover charges at their discretion. Finally, banks that extended overdraft coverage grab their money the instant account holders make their next deposit, which can lead to more low-balance troubles. Consumers who take advantage of linked accounts can replace the money at their discretion.

Many bank tellers aren't well trained in these distinctions, so it's important that consumers ask for them by name, Fox says.

"Say you want to link your checking account to your savings account. Don't ask for overdraft anything, there's too much confusion about what you are asking," Fox said.

Here's a handy chart of bank overdraft fees and estimated APRs.

 

 

The Federal Reserve placed a soft cap on credit card late fees last week, the latest salvo in an ongoing battle between Congress and corporations that squeeze consumers with punishing surcharges and fees.  It's a small victory for consumers, but on many other fronts in this war the news isn't nearly so good.  When you consider the way new rules are impacting checking accounts and credit card interest rates, and Congress' incredible unwillingness to take a stand on 401(k) retirement account fees,  it seems consumers are getting nowhere fast.

The rule imposing a $25 limit on credit card late fees isn't bad, although it is ironically dogged by fine print. When Congress passed the Credit Card Accountability and Responsibility (CARD) Act last year, it directed the Federal Reserve to take a crack at making late fees fairer.  The Fed issued its new rule last week.

Credit card issuers had been charging $30 to $40 per month when consumers were even a day late paying their bills. Starting in August, the top charge in most cases will be $25, saving consumers from $5 to $15. Not bad, but hardly the signal of a new age in consumer protection. And even that small victory comes with asterisks. Consumers who are late more than once can face a higher late charge. And banks can appeal to the Fed to raise the fee, as long as they justify the costs.

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The Fed rule does offer one piece of unqualified good news for consumers.  Inactivity fees will now be banned. This is important, because the appearance of inactivity fees in recent months led to major confusion for consumers. For years, experts have advised cardholders never to close a credit card account because of negative effects on their credit scores.  The new fees suggested that consumers might be better off closing the cards and taking the score hit.  Now, the old advice is once again valid. Make note, however: Banks can still add an annual fee to your cards, in which case, card holders may be better off closing the accounts to save the money.

The good news ends there, however. Since the passage of the CARD Act last year, half of U.S. cardholders saw their interest rate rise or their credit limit fall, millions through no fault of their credit behavior. Consumer groups had asked the Fed to force banks to roll back those changes. On this issue, the Fed punted, saying only that it would encourage banks to "re-evaluate" the changes.

Don't hold your breath.

The American Bankers Association had a generally positive reaction to the news.

“This brings to a close the most sweeping overhaul of the industry since the invention of credit cards. Taken together, the new rules will provide consumers with numerous tools for better management of their credit costs,” said Kenneth J. Clayton, a senior vice president with the trade group.  And the Federal Reserve Governor Elizabeth Duke said in a release that the new rules require that “late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers."

But consumers groups had a much more mixed reaction.

"This is tepid," said Kathleen Day, spokeswoman for the Center for Responsible Lending.  "It's marginally better for consumers, but why not make it great for consumers? ... Once again, the Fed just cannot stand to take a stand. (The Fed) always likes to split the difference. They can't ruffle a few feathers. They are trying to be popular with everybody, rather than do their job as a regulator. How is that working for them?"

That reluctance will almost certainly be tested during the next 12 months, when consumers slowly begin to lose free access to checking accounts. Big banks continue to rattle their sabers about this issue, which threatens to cause a gigantic shift in the American banking landscape. With billions in overdraft fee revenue disappearing when those new rules kick in on July 1, banks have begun testing various fee-based checking accounts.  Soon, simply parking $1,000 in an account or employing direct deposit for your payment will no longer earn a consumer free checking at many banks.

It's been a long time since consumers paid for checking accounts – fee-based accounts went out of favor during the early 1990s --  and the banking world has changed dramatically since.  Today, it's nearly impossible to actively participate in the economy without checking accounts, debit cards, online bill payment and all the other functions that stem from checking accounts. But some consumers who are faced with a $10 monthly fee might join the ranks of the unbanked, using money orders and cash to move around the economy.  Annual fees could also hasten the movement to smaller banks or credit unions, which already has picked up steam. Last year, more than 1 million consumers switched to credit unions, according to the Credit Union National Association. And a study by Bankrate.com found that 39 of the top 50 credit unions offer free checking.

Banks, naturally, will give their largest customers a break.  Use multiple services at a bank and you might enjoy a fee waiver. Rather ominously, the Wall Street Journal reported recently that a Bank of America executive told analysts in April: "Customers will have a choice,... (of) bringing more relationships to us or paying a maintenance fee."

It is undeniable that banks are losing a huge chunk of money as easy overdraft fees disappear. And it's not necessarily bad that banks will be forced to charge transparent, up-front fees rather than back-end, gotcha fees to make their money. It's much more natural for consumers to compare monthly fees than overdraft fees, so the change should be positive for competition.

Switching checking accounts is non-trivial, however, and many consumers will likely just pay up. And of course, the devil is in the disclosures. How will banks communicate the new charges and the new hoops consumers must jump through to avoid them?  At the moment, it will be the Fed's job to make sure the transition is orderly and fair.

Congress could get involved, but if history serves as any guide, federal legislation and Washington's slow-moving ways don't work well for regulating granular issues like monthly fees. Credit card late fees are one good example, but the issues surrounding 401(k) fees take the cake.

It's essentially impossible for a U.S. worker enrolled in a 401(k) plan to determine how much he or she paid in fees on their 401(k) investments during a given year. But the cost can be draining 20 percent or more of a worker's retirement kitty.

The charges are disclosed in oblique ways, such as the common "expense ratio," which is expressed only as a percent to consumers.  Back in 2006, Congress' General Accounting Office found that the vast majority of workers don't understand what they are paying in retirement fees.

There are numerous measures of the cost of unexplained fees, but here's one used in that GAO report: a 45-year old worker who puts aside money in a 401(k) and overpays by just 1 percent in fees will see his available retirement funds shrink 17 percent by age 65. Here's a simpler way to look at it: if a money management company takes 1 percent of your money for 20 years, you'll have almost 20 percent less than you should 20 years later. Obviously, the longer you pay into 401(k) plans, the deeper the cuts are.  A 25-year-old could see more than one-third of his or her retirement money sucked out by Wall Street.

For years, Rep. George Miller, D-Calif., has sponsored legislation that would force investment firms to make those fees clear for consumers. Note, it would not limit the fees; it would merely make them more obvious. And every year, dutifully, Congress finds a way to ignore Miller's proposal.

This year, it looked like the legislation had a real shot. It was attached to the American Jobs and Closing Tax Loopholes Act that was passed by the House of Representatives earlier this year. But the 401 (k) portion was yanked two weeks ago by members of the Senate Finance Committee, which is considering the companion Senate bill.

"(Democratic Chairman Max) Baucus threw it out like a paper airplane," said John Wasik, author of several books on investing, including "The Kitchen Table Investor." "He didn't say why, but I think it was a bargaining chip."  

Exasperated, Miller sent a pie to each committee member last week with a one-third slice removed.

"At a time when the middle class has already lost too much of their retirement savings because of the financial scandals, they shouldn't also be losing out because of unconscionable hidden fees," Miller wrote in a letter that accompanied the pies.  "I urge you to stop Wall Street from hiding 401(k) fees by restoring the House disclosure provisions. The 50 million Americans with a 401(k)-style plan deserve a fighting chance to keep more of their retirement pie."

Clearly, the Senate doesn't agree.

Wasik said the Department of Labor, which regulates retirement accounts, is planning to come out with its own set of 401(k) fee disclosure rules within the next few months.  He's optimistic that those rules will deal with many of his concerns, but until they are published and take effect, U.S. savers will remain largely in the dark.

Which brings us back to the point at hand: Credit card fees, checking account fees, retirement fees and most other hidden charges are simply too elusive for Congressional legislation.  You wouldn't expect Congress to legislate the details of an off-shore oil drill's blow-out preventer -- only a regulator with specialized skills and the ability to act fast can provide the needed oversight.  And only an agency with the ability to set and adjust rules on the fly can prevent the gushing of Americans' money out of the checking accounts and retirement accounts to hidden fees.

That the idea behind the Consumer Financial Protection Bureau, which is part of the financial reform legislation that's now in the stretch run in Washington.  Final details about the agency's reach and influence are still in flux, but as currently constituted, it would have the ability to review the credit card and checking account rules issued by the Fed, according to Day, from the Center for Responsible Lending.  It could, for example, lower that $25 maximum credit card late fee.

"It's very inefficient to get all this stuff through Congress, and then industry just finds its way around it anyway," Day said.  "That's a bad way to stamp out bad products.  We need a new consumer protection agency."

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For years computer security experts have been preaching that users should never share the same password across their connected lives -- at online banking sites, at Amazon, on their Web mail services, even on their cell phones.

Apparently, most people ignore that advice.

A new study by security firm Trusteer found that 73 percent of Web users take their online banking password and use it at other Web sites.  And about half of all consumers utilize the same password and user name at online banking sites and other sites.

"I must say I was very surprised," said Amit Klein, chief technology officer of Trusteer. "It is surprisingly sad that such a large portion of users use their banking credentials at other sites. ... It exposes those users to attacks that would otherwise be impossible. I thought that people would take banking credentials more seriously, but it turns out that in this digital age, this is not the reality."

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When consumers use the same password across multiple sites, hacking becomes trivially easy. If a criminal breaks into a smaller Web site -- say a site created by a local grocery store -- and grabs a cache of passwords, their next step is always the major banking Web sites.  When you consider that 40 percent of U.S. consumers' checking accounts are tied up in the four largest banks, odds are good that the stolen credentials will work for in one of them.

Password overlap also creates an easy end run around sophisticated banking security technology, which is only as strong as the weakest site where the password is used. Banks might enforce strong password creation requirements, for example. But if a consumer uses a bank password at a poorly defended small site, a hacker can break into the small site, steal the log-in information and essentially crack the bank's high-tech system.

"This is something that should be of huge concern both to banks and to users," said Klein.

Trusteer unearthed the data through use of its Rapport security software, which is designed to warn users when they are about to enter a critical banking password into a site where it doesn't belong -- a phishing site, for example. The tool was used to examine the behavior of 4 million computer users during a 12-month period. During that span, the firm found that 73 percent used their online banking password on at least one non-financial Web site.

And it didn't help much when the banks enforced strict password controls. When a bank allowed consumers to pick a user ID, 65 percent used it on other sites. When a bank assigned a customer ID, 42 percent used it at other sites and 42 percent used both the ID and the password on at least one other site. 

'They don't think it's worth the trade off'
Last year, analyst firm Gartner released a survey that reported similar results. It said two-thirds of consumers use the same one or two passwords across all Web sites they access.

But Avivah Litan, who directed the Gartner survey, said that choice might not be as unreasonable -- or as unsafe -- as it seems.

"They are making a choice for convenience over security," she said. "They are using a cost-benefit equation ... and they don't want to try to remember 10 different passwords for everything they do. They don't think the trade-off is worth it, honestly."

While password sharing isn't a safe practice, Litan said, complicating your life with multiple passwords isn't exactly a cure-all.

"The truth is criminals steal your passwords lots of ways, such as recording keystrokes, and if they do that, it doesn't matter whether your password is 15 characters and unique or 7 characters and the same for every site. People have figured this out," she said.

Using multiple passwords is a good idea, but Litan said it is important that consumers understand the risks that remain even if strong passwords are used.

"It is another lock on the door but a lock that is easily picked," she said. "Still, it's always better to put as many blocks in the road you can."

Large banks don't rely on simple user/password combinations to identify users anymore, she added.  Numerous technologies are used to prevent fraud through a strategy called "layered security."  Device fingerprinting of PCs is a key tool, she said. Web sites tag computer hardware by monitoring unique characteristics, such as exact processor speed or time and date settings. Sites that use device fingerprinting see fraud rates drop 15 to 20 percent, she said.

Banks also look for suspicious behavior, such as attempted transfers to unusual accounts. Another hacker giveaway: clicks through Web sites that occur at high speed, showing an automated PC -- and not a person -- is attempting a transaction.  Humans take, on average, about 10 seconds before they click "confirm payment."  Computers controlled by hackers racing through stolen login accounts barely wait at all.

"That's best-of-breed security," Litan said.  "If you as a bank are relying on passwords for security then you have a poor security system."

RED TAPE WRESTLING TIPS
It should be comforting to know that your user ID and password are not all that stands between a hacker and your money. Still, that's no reason to let your guard down. Your banking passwords should be handled with great care, and shouldn't be shared with other Web sites.

And remember, many Web firms that store your critical personal information do not use best-of-breed security on their back end -- meaning you are still at risk.  A criminal who stole your Facebook credentials could easily wreak havoc with your life, so protect those accounts, too.

Klein concedes that the vast majority of computer users will never create unique user/password combinations for all their sites. As a more practical goal, he recommends maintaining three "families" of passwords -- one for critical financial sites, a second for sites that store your personal information, and a third for generic log-ins.

"And you don't want to mix those passwords," he said.

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In New Hampshire, residents pledge to "live free or die." Apparently, that even extends to online banking.

An eagle-eyed New Hampshirite named Dave recently took out his magnifying glass and spotted a new fee in the small print at his bank's Web site. Customers who want to send money from Citizens Bank to an account at other bank — say a brokerage account or a high-yielding Internet savings account like ING Direct — must now pay.

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"Just $3 for outgoing transfers to other institutions," the notice says. It came as part of an announcement titled "New, improved Web site."

Dave, who requested anonymity, didn't see it that way.

"Apparently banks are now charging sneaky transfer fees," he said. "With people going to online banking, banks are starting to charge ATM type fees for transfers."

After complaining to the bank and getting an unsatisfactory response, Dave told his bank that he would live free or …

"I told them I would probably look for a new bank," the 45-year-old said.

Easier said than done, however. Dave's other bank, JP Morgan Chase, also charges the outgoing transfer fee. And in fact, many big banks now tell their online consumers they can't send their money to another bank without paying the $3 fee every time. Curiously, incoming transfers are free. In other words, the bank will gladly take your money, but it won't give it back without a fight.

Mike Jones, a spokesman for Rhode Island-based Citizens Bank, said the new fee actually represents a cost savings for consumers. Before August, Citizens account holders had to use wire transfers to send money to other institutions, which cost $18 to $35. The $3 fee is a bargain, he said.

"This is part of several enhancements to our online banking platform," he said. "We are doing it to increase convenience, and it comes with a cost savings for consumers."

The interest-rate chase
Bank-to-bank transfers have become common at a time when consumers are fighting for every quarter-point of savings interest they can earn. Checking account interest rates are at historic lows. Internet-based savings accounts offer slightly better rates and have attracted about $160 billion in deposits since they exploded onto the scene in the early part of this decade, according to the Tower Group, a financial research firm. Other consumers chase higher yields through money market funds offered by brokerage accounts or other banks. It all leads many customers to habitually move money around to capture that interest.

If that's you, watch out. A few transfer fees could wipe out that extra interest you think you're earning.

Many online banks, such as HSBC, waive outgoing transfer fees for their Internet accounts. But traditional checking accounts often come with the fee, a disincentive for moving money out of their accounts.

"It definitely seems unfair, but I'm not surprised. … This is another example of nickel-and-diming customers to death," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. "Consumers account for $7 out of every $10 in this economy, and it is so unproductive that the financial community is sucking every spare penny from consumers for this non-productive enterprise. The irony is that this nickel-and-diming is hurting our chance of an economic recovery."

Greg McBride, an analyst for Bankrate.com, said that consumers should get used to these kinds of fees.

"This is the banks' equivalent of sticking their tongue out at the customer when they take their money out," he said. While consumers get used to the idea that they can improve their returns with just a few clicks of a mouse, banks will continue to devise disincentives to stop them.

"There's more where that came from."

RED TAPE WRESTLING TIPS
Consumers can generally avoid this outgoing transfer fee. Because banks accept incoming transfers free, account holders should always have the destination bank initiate the transfer. In other words, if Dave wanted to move money from his Citizens account to an ING Direct account, he should initiate the transfer from his ING account — telling ING to "pull" the money in, rather than telling Citizen to "push" the money out. At least for the moment, "pulled" transfers remain free.

Curious about high-yielding savings accounts? Visit bankrate.com's interest rate page or highyieldcheckingdeals.com 

 

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