Citi will voluntarily end a practice that enables banks to charge customers repeatedly for overdraft protection. Image: CC TheTruthAbout/Flickr

In a rare case of voluntary consumer protection in the financial industry, Citi announced that it will change the way it clears checks in order to minimize overdraft protection charges. Financial reform restricts banks from providing overdraft protection for debit cards unless customers opt in, but the rules don’t apply to checking accounts. On Monday Citi said it will curtail the practice of milking overdraft fees from checking accounts by processing smaller checks first.

How banks milk checking account overdraft fees

Citi will start processing checks written for smaller amounts first as of July 25. Before it announced the change, Citi, like most major banks, processed larger checks first in order to increase the likelihood of multiple overdraft charges on checking accounts. Consumer advocates have long denounced the practice, but the banks commonly spin their deceit as a benefit to customers. According to banks, processing larger checks first ensures that high priority bills such as mortgages are paid on time. In reality, the practice works in reverse. For example, if a bank customer has a $100 checking balance and writes checks for $90, $25 and $15, the bank will clear the $90 check first. This leaves a $10 balance, which enables the bank to charge overdraft fees as high as $39 for both the $25 and $15 checks — an extra $78 in ill-gotten gains. As of July 25, Citi will clear the $25 and $15 checks first and only be able to gouge the customer once, instead of twice.

Few consumers are opting in

New financial reform laws passed in 2010 require banks to get permission from customers before enrolling them in debit overdraft loan programs. But according to Consumer Reports, banks have adopted misleading “opt-in” marketing strategies promoting expensive overdraft loans while failing to mention lower-cost alternatives that are available. Citi and Bank of America decided to eliminate debit overdraft protection altogether. Now they decline uncovered transactions at no cost, allow customers to link their checking account to savings, or offer an overdraft line of credit. A Consumer Reports poll found that only 22 percent of debit card holders have opted into overdraft loan programs. The poll also found that 70 percent of consumers would also like to have a choice about overdraft protection for checking accounts. Thirty eight percent of respondents said they would opt out if allowed to do so.

Expect creative customer gouging to continue

In 2009, banks penalized customers with overdraft protection on debit cards to the tune of about $20 billion. Banks collected another $12 billion from overdraft fees on checking accounts. Bank lobbyists managed to get voluntary overdraft loan programs for checking accounts exempted from financial reform, but the FDIC is considering an opt-in requirement at smaller state chartered banks for overdraft coverage on paper checks and electronic payments. Consumers Union, the non-profit publisher of Consumer Reports, is urging the FDIC to require all banks to get consent before before charging customers for checking account coverage. If the FDIC goes along, consumers can expect banks, including Citi and Bank of America, to create other charges such as increasing monthly checking account fees.  When regulators respond, banks will find other ways to make money for nothing.

Sources

Associated Press

Consumer Reports

New York Times

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