Where is the line separating fair business practices from those that mislead or confuse consumers? Does it matter that a questionable practice also has a deterrent effect - say, a fee imposed on customers whose mistakes generate extra expenses? Does it matter if that fee dwarfs the actual costs?
Those kinds of lines sometimes seem tough to draw. But they're at the heart of a long-running debate that the Consumer Financial Protection Bureau waded into last week. The thorny subject: bank overdraft fees.
On one side are U.S. banks that, according to Moebs Services, generated close to $30 billion last year from customers' overdrafts - both from mistakes and from some overdrafts that were, presumably, intentional.
On the other are consumers burned by the fees - especially young people and lower-income depositors - and organizations such as the Consumer Federation of America and the Pew Health Group that warn about the costs of a banking system increasingly reliant on "gotcha" charges.
The CFPB is seeking public input on the effect of overdraft practices. I hope it gets an earful from the readers I've heard from over the years, such as the Bucks County student who bought a "$35 hoagie" - $4 on the debit card for Wawa sandwich plus $31 for his bank's overdraft fee. Or, more to the point, $31 for the odd courtesy of not simply saying "Declined" at the cash register.
To me, that sandwich and its cousins - including the "$40 cup of coffee" that CFPB Director Richard Cordray mentioned last week after announcing the agency's overdraft inquiry - have come to epitomize the strange role of the so-called nuisance fee in the modern banking system. But overdraft costs aren't simply an ironic punch line. The evidence suggests that, by design, they drain hundreds of dollars from the bank accounts of people who are least able to afford the losses.
It wasn't always thus, even if overdrafts themselves were always a nuisance - for depositors and for banks. I certainly made such errors when I first began banking. Whenever I discuss this topic, I hear from readers who insist they've never overdrafted an account, and all I can do is tip my hat to their perfection.
But back then, we first offenders quickly learned the consequences - perhaps via stern calls from a bank or merchant. Repeat offenders faced bounced-check fees, and genuine deadbeats had accounts canceled. But the fees weren't a profit center.
In recent decades, though, something else happened. As electronic banking, ATMs, and debit cards multiplied the ways consumers use checking accounts, banks discovered they could cash in on customers' errors, often by offering payday-loan-like products billed as "bounce protection."
The magnitude of the change is stunning, especially at banks that have instituted automated systems for approving overdrafts based on instant risk analyses. Moebs says overdraft-fee revenue at U.S. banks peaked at $37.1 billion in 2009, with households paying an average of nearly 10 such fees per year.
Not that the fees are distributed evenly, of course - if they were, banks could never have gotten away with them. A study by the Federal Deposit Insurance Corp. of larger banks with automated programs showed that in 2006, just 9 percent of depositors generated 84 percent of overdraft fees. And those fees amounted to about three-fourths of the banks' income for deposit-account services.
Are people just more careless? The banks might want you to think that, and perhaps some are. It's rare today to see someone record every transaction in a check register, or even the smartphone-app equivalent.
But something more than carelessness is at work - especially in the games most banks play with accounting by clearing transactions in size order, from largest to smallest.
Bankers often argue that they're helping customers by prioritizing their largest payments. Better to clear the mortgage or rent, they say, and bounce the small check you wrote to your buddy for the baseball tickets.
But with debit cards in widespread use for small purchases, the collateral damage from that practice has been huge. Rather than clear a half-dozen small purchases and then bounce a single large check or point-of-sale transaction - or, more likely, allow it to go through as a fee-generating overdraft - banks clear the single large item and generate a half-dozen overdraft fees.
Even before the CFPB was created, bank regulators have had their eyes on overdraft games. In 2010, new Federal Reserve rules required banks to quit approving debit-card purchases when a customer was in the red unless that customer had agreed in advance to the bank's "standard overdraft practices."
But the Fed stopped short of declaring such practices unfair and deceptive - as it did in 2008 when it finally cracked down on gotcha credit card fees. And consumer advocates complain that some banks use deceptive tactics to get consumers to opt in.
Or they just confuse them. Pew's Safe Checking Project has found that overdraft disclosures are typically buried in a pile of paperwork handed to new customers - paperwork averaging an astounding 111 pages at the nation's 10 largest banks, Pew found. And sure enough, Pew's focus groups have shown considerable confusion.
"We had one woman say, literally, 'I opted in so I could avoid the $35 fee,' " says Susan K. Weinstock, the project's director. If you just say no, the transaction will probably be declined, but the bank can't charge the fee.
There are better versions of overdraft protection such as linking a checking account to a line of credit, as well as other safeguards such as low-balance text alerts. Your bank should have offered them. If it didn't, that's the kind of input the CFPB needs.
Cordray said last week that it was "wrong to confuse consumers deliberately for financial gain."
Maybe it's not so tough a line to draw, after all.
To comment to the CFPB, follow the instructions at www.regulations.gov, using Docket No. CFPB-2012-0007.
Contact columnist Jeff Gelles at 215-854-2776 or firstname.lastname@example.org.