Mike Fullington is a typical busy college student.
The Cheektowaga native is in his senior year at Medaille College in Buffalo, hangs out with his friends, and also works part-time to generate some income. With all that, he admits he doesn't check his HSBC Bank USA account as he should.
Still, he was astounded and angry on several occasions recently, when he used his debit card to get coffee from Tim Hortons or a sandwich at Subway between classes, accidentally overdrew his bank account by a dollar or two, and got hit with a $35 overdraft charge.
The penalty fee was more than 17 times the size of his mistake.
"It's not fair that I have to pay a $35 fee for going over by a dollar or two, when there are people who go over by $500 or $1,000 and get the same fee I do," said the 21-year-old photography student. "It's your own responsibility toward this, but banks should notify you if you're going to incur a fee."
Fullington's anger is typical these days for many American consumers and advocacy groups, who are outraged at the level of penalty fees banks
are charging and earning on checking accounts and credit cards.
It's a growing personal finance trap that may cost some families more than $1,400 a year.
Consumers and other critics say the fees themselves are too high for the mistakes they're designed to penalize or deter. They also complain they're being charged too often, on too many people, because bank policies and procedures have made it easier for consumers to incur the fees in the first place.
"The banks are charging more, higher and different fees," said Richard Barrington, a Rochester-area personal finance expert for Money-Rates.com. "The fees can be insidious."
The array of charges can include monthly or annual fees, ATM fees, over-the-limit fees on credit cards, and late fees on credit cards. But deposit overdraft fees have garnered particular attention of late because of the size of the fee -- typically $30 or more for each instance -- and the frequency. And they say most consumers just aren't aware of them until it's too late, since any disclosure is in small print in dense booklets.
"The process seems to be skewed significantly against the consumer," said Mindy A. Bockstein, chairwoman and executive director of the state Consumer Protection Board, which advocates on behalf of consumers. It supports tighter regulation and better disclosures for overdraft programs, as well as caps on what Bockstein called "outrageous" fees.
"These are the types of fees that are egregious, because for the most part, consumers are unaware and the banks are taking advantage," she said.
Since most banks post the largest debits or withdrawals first, consumers can be hit with several charges at once if a single large transaction clears before several smaller ones. And most banks now also automatically enroll customers in programs to cover debit card or ATM overdrafts for consumers, instead of rejecting them, so that means more potential fees.
"Thirty-five dollars is a lot to charge on a fee," said Scott Laughlin, client services manager at Consumer Credit Counseling Service of Buffalo. "But then it makes it worse when you're getting charged it multiple times."
>Big costs for banks
For their part, banks argue that having access to an account is a privilege. They say the newer "courtesy" overdraft programs -- automatically paying overdrafts instead of bouncing them -- is intended to help consumers avoid embarrassment or inconvenience when a transaction doesn't go through.
But banks still must cover the costs of maintaining accounts, computer systems and infrastructure to serve customers, as well as providing statements and complying with laws.
"There is a huge cost to providing checking account services," said Nessa E. Feddis, senior federal counsel at the American Bankers Association, comparing it to maintaining rail or telephone lines. "Just because you have a car, it doesn't run on nothing. You've got to put gas in the car."
And "anytime we pay on an account where funds are not available, we accept liability and therefore the risk of not getting paid," said J. Lanier Little, executive vice president of consumer banking for First Niagara Financial Group. "So there is a cost."
As for the size of the fee, that's necessary to get consumers' attention, Feddis said. "Is it appropriate to give someone a $100 ticket for parking in the fire lane? If you're the driver, you might not think so, but the fire marshall might have a different view," she said. "If the fee for parking in the fire lane were $5, a lot of fire trucks might not be able to get through."
"The fee is intended to punish some behavior and make sure it doesn't happen again. If there was no penalty for doing it, the behavior would be more widespread," said Scott Strumello, associate at Auriemma Consulting Group, a payments card advisory firm on Long Island.
>Fees are preventable
Ultimately, banks argue that it's consumers' responsibility to monitor their accounts, and to take steps to make sure they don't overdraw them. Such options include the use of online or even mobile banking to check balances or transfer money on the go, or the use of automatic e-mail or text message alerts to notify a customer when their balance is low.
"These fees are meant to serve as a deterrent, but it's important for customers to understand that these fees are preventable," said Bank of America Corp. spokesman T.J. Crawford. "There are different ways that the bank can help customers to prevent these fees."
Indeed, according to a new survey of 1,000 consumers by the ABA, 82 percent of bank customers did not pay an overdraft fee in the previous 12 months. Of the rest, nearly half paid just one or two fees.
One complication with warning consumers is that many small-dollar transactions aren't actually approved by the bank at the time of the transaction, Feddis said. Merchants swipe the card to verify that it's good, but don't verify that the money is there. So the bank isn't yet aware of the transaction, and can't warn the consumer.
In response to criticism, some banks do give customers the right to opt out of automatic overdraft coverage altogether. HSBC even gives customers the choice, when they sign up for their account, of specifically not having electronic transactions, such as debit card purchases, included for automatic overdraft payments.
"HSBC is committed to ensuring that information on overdraft terms and conditions is both clear and useful for customers to make an informed decision about how they choose to manage their accounts," said spokesman Neil Brazil. "We believe all our charges are reasonable and appropriate."
And many banks, including HSBC, Bank of America, First Niagara, M&T Bank Corp., KeyCorp, Northwest Bancorp, Evans Bancorp and Financial Institutions' Five Star Bank, also offer cheaper alternatives, such as linking the checking account to a savings account, line of credit or credit card. In case of an overdraft, money is automatically transferred to cover it, either for a lower charge for each incident or day of incidents or for a flat annual fee.
>Congress may act
Still, critics are demanding action, urging Congress or regulators to intervene. And their complaints are starting to gain traction with key federal lawmakers like Sens. Charles E. Schumer of New York and Christopher Dodd of Connecticut, as well as Rep. Carolyn Maloney, D-N.Y., who are sponsoring legislation to address the concerns.
Federal regulators have also been considering imposing new rules that Bockstein said are long overdue. "Banks certainly are entitled to charge fees for services," Bockstein said. "The ultimate issue is consumers have a right, and an expectation exists, to be treated fairly."
"Bottom line, debit cardholders are getting scammed by their banks," said Schumer, who also supports President Obama's proposal for a new consumer financial regulatory agency. "It's time to stop them dead in their tracks."
>A big moneymaker
The problem stems from the industry's growing reliance on so-called "noninterest" income as a bigger part of overall revenues.
Last year, banks and credit unions earned $39.5 billion in deposit account fees, including $37.2 billion just from overdraft or "insufficient funds" charges, more than double the $16 billion in overdraft charges in 2004, according to the Federal Deposit Insurance Corp. and a report by Georgia consulting firm Bretton Woods. It's also nearly 10 times the industry's total profits last year, though less than half of profits in a normal year.
That included $4.06 billion in overdraft fees in New York state, second only to California's $4.07 billion, the Bretton Woods report said. Broken down, that comes to 12.7 overdraft fees totaling $368.51 per banked household nationwide last year, and nearly $659 per household in New York.
Banks also earned $83.7 billion in additional non-interest income, which includes fees from the use of banks' ATMs, as well as from renting safe deposit boxes, selling checks and money orders, and other services, according to FDIC statistics. And that doesn't include the fees from credit cards.
Congress just passed legislation to reform the credit card industry and protect consumers by changing or restricting certain industry practices. As a result, card issuers expect to collect billions of dollars less in late and over-the-limit fees, as well as interest income. And the card industry already lost $1.7 billion in the first quarter.
In the meantime, calls are now mounting for action against overdrafts and the policies that have encouraged the growth of such fees, which Schumer this past week called "abusive."
"They have big pressure on them to maximize profits, so they keep finding new ways to make money, all too often, off the consumer's back," Schumer said Friday. "We finally put a limit on them raising the credit card balances . . . and now they've found the overdrafts."
During a news conference Monday in Cheektowaga, Schumer accused banks of trying to "wring every last dollar out of their customers" through strategies such as "rearranging charges so that there are as many overdrafts as possible."
He said the practices "disproportionately" affect low-income consumers, such as students like Fullington and senior citizens on a fixed income, with each group paying nearly $1 billion in overdraft fees annually. According to Schumer, the average overdraft is $20, but the average fee is $34.
Schumer, Dodd and Maloney are sponsoring legislation to address these issues by preventing banks from rearranging charges and mandating alerts to cardholders when they are about to overdraw. Schumer said that will cut overdraft fees "almost in half."