Consumer Watch: A small silver lining for bank overdrafts

If you're looking for small silver linings in the financial collapse and the Great Recession it spawned, here's one possibility: the end of the $35 hoagie.

That's the sandwich that, to me, came to epitomize the dangerous presumption that the market will always take care of itself, and its corollary: that banks and other businesses can do no wrong if their intentions are laid out ahead of time in the fine print.

The high-priced hoagie came from a Wawa, but the convenience store chain wasn't to blame. It was a $4 sandwich, to be precise, plus a $31 overdraft charge - triggered when college student Jeremy Spiller bought it with his Visa debit card and his bank balance fell 11 cents short.

Spiller's father, Joel, of Churchville, Bucks County, called in 2004 to complain about the $35 hoagie. Joel Spiller has an M.B.A. and works in data-network design, but he could barely understand the bank statements showing how certain transactions sparked overdraft fees.

Above all, Spiller was appalled that Wachovia Bank hadn't simply declined the purchase. No money, he reasoned, should have meant no lunch.

I thought about Spiller last week when four major U.S. banks - including Wachovia's parent, Wells Fargo - announced plans to ease up on their aggressive collection of overdraft fees.

Each promised to quit slapping account holders with overdraft fees, now often $35 or more, when they lose track of their balances and run short by less than $5 or $10.

Each also said it would start to offer customers a chance to have their debit card and ATM overdrafts refused - an option that solved Jeremy Spiller's problem five years ago when he belatedly learned that Wachovia offered it.

But it would be a mistake if the banks' mostly minor concessions, prompted by growing pressure from regulators and lawmakers, were allowed to forestall a more thorough crackdown.

The Spillers, to be sure, have had no further complaints. Once Wachovia allowed Jeremy Spiller to have his transactions refused if they would push his balance into the red, he had bought his last $35 hoagie.

But plenty of others have similar stories. Overdraft and insufficient-funds fees have continued to grow, and become a hugely lucrative niche for banks. They're expected to generate $38.5 billion this year, according to Moebs Services, an economic-consulting firm.

The fees' critics say the business has been built on the backs of the unsuspecting and the financially stressed.

"People think that you can't use your debit card if you don't have the money in the bank, and that's the way the system ought to work," says Jean Ann Fox, of the Consumer Federation of America. "What banks have done is turn your checking account into a credit product without providing the protections that credit is supposed to get in this country."

Those protections would start with a standard disclosure of the credit's cost: an APR, or annual percentage rate, which states the price of a loan if the money were borrowed for an entire year.

Banks don't have to provide an APR for overdraft loans, because they have convinced bank regulators that paid overdrafts aren't loans at all. But last fall, the Federal Deposit Insurance Corp. crunched the numbers for a study on fees at banks it oversees. The results made payday loans look positively cheap.

The study said the median overdraft for a debit card purchase was $20, and the median fee was $27. Viewed as two-week extension of credit, that's a loan with an APR of 3,520 percent, the FDIC said.

As outrageous as those costs are, Fox says they vastly understate the real price of overdraft loans for many consumers. Some banks impose multiple overdraft charges in a single day, no matter how small the debit transactions that triggered them.

Each of the four major banks that announced changes last week said they would limit the number of overdraft fees they charge per day, and committed to ending fees for small overdrafts such as Spiller's 11-cent mistake.

But only one, JPMorgan Chase, promised to give all customers an explicit, up-front choice about whether they want its debit card "overdraft services" at all.

That's a courtesy owed to all bank customers - many of whom turned to debit cards because they wanted to avoid overusing credit. Bank regulators or Congress should make sure they get it.