Checking Accounts May Have Fewer Consumer Safeguards than Credit Cards


Many consumers assume the terms of their checking accounts, the most widely used financial services product in the U.S., are simple, at least compared to such other payment methods as credit cards. But a study from the Pew Health Group shows that consumers are lost about their checking accounts, resulting in unnecessary overdraft fees and penalties.

Pew analyzed 265 checking accounts at 10 of the largest banks and found that the average checking account has a disclosure of 111 pages, an $8.95 monthly fee, an overdraft penalty fee of $35, an overdraft transfer fee of $10, and an extended overdraft penalty fee of $25 every seventh day the account is overdrawn, among other findings.

"What surprised us most is that it is so hard for consumers to understand their checking account," said Eleni Constantine, director of financial security at the Pew Health Group, the consumer-product safety arm of The Pew Charitable Trusts. "We didn't expect this lack of transparency."

She said that's especially dangerous when 9 out of 10 Americans have checking accounts.

The report, called "Hidden Risks: The Case for Safe and Transparent Checking Accounts," made a number of specific policy recommendations so that checking accountholders can experience a similar level of protection as credit card users have from high fees.

"Without that information indexed, it's really hard for consumers to figure out their checking accounts. It's important because if consumers can't understand, then they can't shop and can't shop properly," Constantine said.

A report from Moebs Services estimated that banks will take in a total of $38 billion in overdraft fees in 2011, the highest ever for the industry. The industry received $37.1 billion in revenue from overdraft fees in 2009.

To prevent consumers from unknowingly paying these fees, Pew recommended that banks have a single page disclosure box for their checking accountholders. Similarly, credit card companies are required by law to publish the "Schumer box," which requires companies to list in the same format their long-term rates, like annual percentage rate, or APR, and transaction fees. The box was named after Sen. Charles Schumer (D-N.Y.) who led the legislation enacted in the late '80s.

Pew's model disclosure box for checking accounts includes information like the minimum deposit needed to open an account, ATM fees, account closing fees, overdraft transfer and penalty fees and the posting order in which withdrawals and deposits are processed.

That last issue – transaction reordering – can be especially costly to consumers, said Constantine. Banks can maximize overdraft fees they collect based on which ordering method they choose. While most consumers expect banks to post transactions to their account in chronological order, Constantine said, banks may choose to process transactions from biggest to smallest, or withdrawals before deposits. Mathematically, both methods maximize fees consumers have to pay, said Constantine.

"We looked at what banks disclose," Constantine said, "and as of October, banks were saying, 'We can choose to reorder your transactions any way we want.'"

Constantine said that some banks noted in a survey in October that they post consumer transactions chronologically.

"Banks can do this voluntarily," Constantine said. "We fully support them and want them to do it."

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