Consumer Watch: Overdraft protection underdone

For Benjamin Cohen, August arrived like a bear this year, tearing into both his life and his finances.

Headlining Cohen's woes were two car crashes. The first occurred when he was rear-ended on a wet Route 422 near his job at Philadelphia Premium Outlets in Limerick. The second came several days later, after he got lost en route to a concert in Philadelphia.

But what likely hurt worse were the blows to his bottom line: In the space of just three days, Wachovia Bank hit Cohen with $630 in overdraft fees for what the bank said were 18 overdrafts, all for use of his Visa debit card.

So what makes Cohen's story worth hearing at a moment when overdraft complaints, however righteous, may seem a dime a dozen?

You may have heard last week that after years of study, the Federal Reserve finally told banks that they'll have to quit assuming that customers want their overdrafts to be paid in return for a fee. Come July, banks will have to ask customers up front whether that's a trade-off they welcome.

But here's the thing: Cohen, for all his youthful foibles, was a savvy enough consumer that he had already taken the very step the Fed says all bank customers deserve. After an earlier taste of penalty fees, Cohen had opted out of Wachovia Bank's system of routinely covering overdrafts at $35 a pop.

His aim was simple: If his account lacked funds to cover a purchase or an ATM withdrawal, Cohen wanted Wachovia to reject the transaction.

He even went a step further. With the help of his father, Bucks County lawyer Alan Cohen, Benjamin Cohen turned extra-vigilant about avoiding transactions that would push him into the red.

In fact, on the night that Wachovia hit Benjamin Cohen with the first 10 overdraft fees - charging him $350 in penalties for a total of $28.83 in debit-card purchases - Alan Cohen had gone online to the bank to transfer funds into his son's account to avoid any shortfall.

What went wrong? Alan and Benjamin Cohen have pieced together some of the story, and I've tried to fill in the blanks. Whatever its moral - perhaps it should be something pithy about the failure of "the best-laid plans" - this is a tale that illustrates some troubling pitfalls in modern banking and debit-card use.

The perils of accounting

The first problem, it turns out, is that Alan Cohen didn't realize that transfers into his son's account made after 9 p.m. would show up as "available" but would not actually be posted to the account until the next day.

Cohen established the joint account partly to help Benjamin, 23, avoid overdrafts if emergency spending needs arose - as they did after his second car crash.

But that night, the plan failed. Bank records show that Alan Cohen moved $35 into Benjamin's account on Aug. 3 that wasn't credited until the next day - enough to cover all 10 of Benjamin's small debit-card overdrafts.

Then there was the problem that generates many overdraft-fee complaints: the order of payments.

When banks do their day's-end accounting, they typically post debits, including checks and withdrawals, in order of size rather than chronologically, starting with the largest.

As banks typically do, a Wachovia spokeswoman called that policy a courtesy to customers who want major checks, such as mortgage payments, to clear before less important ones.

But the consequence is often a windfall for banks' overdraft-fee collections, especially those generated by small debit-card purchases. In Cohen's case, simply reversing the posting order would have meant one overdraft fee that Monday, not 10.

Why weren't Cohen's purchases simply denied, given that he had opted out of overdraft coverage? And why did the bank allow eight more overdrafts - including two $20 ATM withdrawals - that posted over the next two days after the first $350 in overdraft fees put Cohen into the red?

At this point, the explanations get a bit murkier, especially since Wachovia spokeswoman Barbara Nate said she couldn't discuss details of Cohen's transactions.

The most likely answer may be a quirk in the bank's complex accounting systems. Although they were posted as late as that Wednesday, all the overdraft transactions apparently occurred late Monday or early Tuesday, when the transferred funds appeared falsely to be available but before the first $350 in overdraft fees were deducted.

To the Cohens, the explanations long ago wore thin.

"They bank on this happening," says Benjamin Cohen, who adds that he opted out of overdraft coverage to avoid getting hit with $35 penalties for spending somebody else's money.

"I'm trying to stay away from credit," Cohen says. "Thirty-five dollars could determine whether I eat today, or have fuel to go to work."

Alan Cohen says he spent at least an hour on the phone with Wachovia representatives, trying to understand the system and express his dismay at the charges.

"They're barely able, if at all, to explain what happened," Alan Cohen says. "Finally they would say, 'You have to keep track by hand, or you have to keep a lot of extra money in your account.' It's pathetic."