Hawaii consumers upset about getting dinged with multiple overdraft fees are claiming that some banks are unfairly trying to maximize profits with the charges, but the financial institutions say customers have only themselves to blame.
Bank of Hawaii, the state’s second-largest bank, was sued last month by customers alleging the bank used "unfair and deceptive overdraft fee practices" by re-ordering debit card transactions from the highest amount to the lowest. The suit said this practice allowed the bank to deplete the customer’s available funds as quickly as possible and maximize overdraft fees.
The banking industry generated $37.1 billion in overdraft fees in 2009 and was expected to earn $36 billion in 2010, according to a study by Moebs Services, a Lake Bluff, Ill.-based economic research firm. Moebs said it expects overdraft revenue to increase to $38.5 billion this year, the highest ever for the banking industry.
Greg McBride, senior financial analyst for Bankrate.com, said he doesn’t have any sympathy for consumers who complain about getting overdraft charges.
"Overdrafts remain completely avoidable," he said. "Avoiding overdrafts is the financial equivalent of being able to walk and chew gum. Anyone can stumble once, but most consumers have figured out how to avoid routine overdrafts."
A new law that went into effect in the middle of last year requires debit card customers to give their permission, or opt in, before banks can assess overdraft charges. Customers opt for the overdraft protection service so the bank will cover their purchases even when they don’t have sufficient funds. But the bank typically charges a fee of $25 to $30 for each overdraft.
The simplest way to avoid overdraft charges is to not opt for overdraft protection.
But most customers do opt for overdraft protection, said Michael Moebs, CEO of Moebs Services. About 100 million out of 130 million bank and credit union checking accounts, or 77 percent, have given consent to debit card overdrafts, he said.
The lawsuit filed last month alleges Bank of Hawaii’s system of re-ordering debit card transactions from the highest amount to the lowest is unfair.
Moebs said 33 percent of all banks use a similar system.
Given those numbers, Moebs said the suit against Bank of Hawaii doesn’t stand a chance of being successful.
"It’s an absolute waste of time; it’s a nuisance suit," he said. "There are dozens and dozens of studies done by others that show that the consumer overwhelmingly likes high to low because they want their mortgage, they want their car payment, they want those paid. So the high to low, while it’s controversial, it’s something that the vast majority of consumers want."
Other banks do the inverse and debit accounts from smallest transaction to highest transaction, ensuring customers that there are fewer overdraft charges. Yet another way to debit accounts is chronologically, which takes into consideration the order in which transactions occurred.
Bank of Hawaii changed its methodology in January to charge debit card users from the lowest transaction amount to the highest.
Perkin & Faria LLLC, the Honolulu-based local counsel representing plaintiffs in the Bank of Hawaii suit, said it has received "dozens" of calls since filing that suit. Attorney Brandee Faria said the law firm, which also is examining the overdraft fee practice of Hawaii credit unions, is planning to sue an additional two Hawaii banks this week, but declined to identify them.
American Savings Bank and Central Pacific Bank, the state’s third- and fourth-largest banks in terms of assets, charge debit card users overdraft fees from the highest dollar amount to the lowest — similar to the method previously used by Bank of Hawaii.
Central Pacific said it debits from high to low based on risk categories, starting first with automated teller machine withdrawals since the cash can’t be recovered, and then proceeding to recurring payments, electronic transactions and then finally checks. Central Pacific said it will switch its policy next month to debit customers’ accounts based on chronology — when the transaction occurred — within those risk categories.
"The FDIC (Federal Deposit Insurance Corp.) came out with guidance (last year) in managing excessive overdraft, and one part of that was the posting sequence to not maximize the amount of overdraft fees being charged," said Carrie Brown, vice president of product management for Central Pacific. "So we felt it was fair to post the items in the order they occurred — transaction date and time. With checks we’re looking at serial numbers."
American Savings spokeswoman Laurie Komatsu said the bank charges overdraft fees from high to low because "historically, larger payments have been the more important ones to our customers, like mortgages and car payments."
Regarding whether the bank is planning to change its method, she said that "we are continually assessing features and functionality based on best practices and customer needs."
First Hawaiian Bank, the largest in the state in terms of assets, and Territorial Savings Bank, the fifth largest, already charge overdraft fees from the lowest to highest amount.
"We determined that the methodology (of debiting from high to low) was not in keeping with our primary core value of customer care," First Hawaiian spokesman Brandt Farias said. "So for many years our policy has been to sequence customer debit transactions from lowest to highest, which is the least costly for the customer. Additionally, we process our paper check transactions in the order of the check numbers from lowest to highest."
Sandra Thompson, director of the FDIC’s Division of Supervision and Consumer Protection, said overdraft programs are not intended to be used as a regular source of credit.
"There are cheaper alternatives," she said. "Relying on overdrafts can lead consumers to incur substantial and unnecessary costs, as well as pose reputational risks for the banking institution. When the cost is extremely high compared with the overdraft benefit, or when overuse of the product is allowed, the result is often customer dissatisfaction with both the product and the institution offering it."
American Savings Bank customer Christopher Johnson, chairman of the Mililani High School science department, said he’s gotten the runaround when he’s complained to the bank about its policy of charging overdraft fees from the highest to lowest amount.
"I have literally lost hundreds of dollars, and more like a couple of thousand over the last few years, due to this ridiculous practice and have complained many times, and they just say, ‘That’s the way we do it,’" he said. "The lost money has caused me much stress, as they have constructed a system that is detrimental to their own customers, but is very good for the ASB bottom line."
Bank of Hawaii customer Mel Ferreira said "it seemed that BOH made sure they were getting extra money in their fees whenever and wherever possible," including for checks he claims already had cleared his account.
Ferreira acknowledged, though, that he could handle his money better.
"Like most people, I could do a better job managing my finances, including the occasional check overdraft," he said. "If I exceed my balance, I expect to have to pay a fee. What I don’t expect is to have to pay multiple fees because a bank tells me they’re doing me a favor by doing it that way. To me it just smacks of greed and arrogance."
For Bank of Hawaii’s part, Peter Biggs, vice chairman of retail banking, says the bank encourages its customers to be familiar with their available balance so as not to exceed it and incur an overdraft fee. He said customers can check their balances through an ATM, a mobile device, an automated call system, the Internet or a branch itself, as well as signing up for an e-mail alert system that will notify them when their balance falls to a specified threshold. Biggs also said customers can sign up for an overdraft protection plan that transfers money from a customer’s savings account to a checking account for a $10 fee when there’s an overdraft, or can sign up for a line of credit for a $15 annual fee — plus a 10.25 percent annual interest rate — that will transfer funds to a customer’s account in case of an overdraft. The transfer fees and interest vary by bank.
The average overdraft fee nationwide last year was $30.47, according to a 2010 Bankrate.com study. That figure is above the amount changed by each of the state’s five largest banks.
Income from overdraft fees dropped at Hawaii banks last year.
Bank of Hawaii’s overdraft fees decreased by approximately $6.2 million in 2010, and it forecasts its overdraft fees to be $14 million lower in 2011 than 2010.
"They’ve actually been conservative in how they’ve pursued overdraft fees, and I would say relative to most banks they’ve been much more cognizant of customers than they have shareholders as it relates to that particular fee structure," said analyst Brett Rabatin of Birmingham, Ala.-based Sterne Agee. "They have a fairly low opt-in rate of 38 percent, lower than the banking industry, so I would put little merit on a lawsuit regarding those fees."
American Savings Bank saw a decline of $4.4 million from overdraft fees in the second half of 2010. The bank generated $15 million from overdraft fees in 2009.
Central Pacific Financial Corp., the holding company of Central Pacific Bank, said overdraft fees decreased by $1.7 million in the second half of 2010 compared with the year-earlier period.
Avoiding overdraft fees
There are several ways that bank customers can prevent getting dinged with costly overdraft fees:
» Check your available balance either on the Internet, with a mobile device, through the automated phone system, with a customer service representative on the phone or at the branch itself.
» Sign up for e-mail alerts that will trigger a notice to you whenever your balance falls to whatever threshold you desire.
» Link your savings account to your checking account so that money can be transferred for a nominal fee, $10 or so, whenever you are overdrawn.
» Sign up for a personal line of credit so that for an annual fee, roughly $15 to $25, funds can be transferred to your checking account if you overdraw. You also would incur a low double-digit percentage annual interest rate for as long as those borrowed funds are being used.
» Balance your checkbook.
» Keep an extra "slush fund" in your checking account, say $100, that you never touch. If debit card expenditures go into that $100, replenish it as soon as possible.
» Pay cash for gas if you can, rather than using a debit card. Some gas stations put a hold for a certain amount on your account since the amount you are pumping is unknown when you swipe your card. Later, the remaining amount will be taken out of your account if it exceeds the amount that was held.
» Pay attention to transactions that you have made but that might not be reflected in your account.
» Keep track of what you are spending.
» Remember that once you exceed your available balance, each transaction you make will trigger an overdraft fee. Some banks, though, will waive those fees if you go over by just a minimal amount.
The new rules
» You choose: In the past, some banks automatically enrolled you in their standard overdraft practices for all types of transactions when you opened an account. Under the new rules, your bank must first get your permission to apply its standard overdraft practices to everyday debit card and ATM transactions before you can be charged overdraft fees. To grant this permission, you will need to respond to the notice and opt in (agree).
» Existing accounts: As of Aug. 15, 2010, if you didn’t opt in (agree), your bank’s standard overdraft practices won’t apply to your everyday debit card and ATM transactions. These transactions typically will be declined when you don’t have enough money in your account, but you will not be charged overdraft fees.
» New accounts: As of July 1, 2010, your bank cannot charge you overdraft fees for everyday debit card and ATM transactions unless you opt in. If you opened a new account before July 1, 2010, your bank should have treated you as an existing account holder, and you should have received a notice about your bank’s standard overdraft practices and would have had to decide whether you want them for everyday debit card and ATM transactions.
» Flexibility: Whatever your decision, the new overdraft rules give you flexibility. If you opt in, you can cancel at any time. If you do not opt in, you can do so later.
» Checks and automatic bill payments: The new rules do not cover checks or automatic bill payments that you might have set up for paying bills such as your mortgage, rent or utilities. Your bank might still automatically enroll you in their standard overdraft practices for these types of transactions. If you do not want your bank’s standard overdraft practices in these instances, talk to your bank; you might or might not have the option to cancel.