MPR: Banking on Fees, Part 1

Banking on Fees, Part 1:
Turning Rubber into Gold
By Bill Catlin
September 10, 1997

First Half RealAudio 2.0 14.4, Second Half RealAudio 2.0 14.4

CONSUMER GROUPS HAVE BLASTED banks for excessive fees in an era of record profits. Much of the recent criticism has focused on automated teller machine fees. But the amount banks collect in bounced check fees dwarfs their income from the new ATM surcharge.

Bounced checks bring in big money: $120 million in fees for Minnesota banks two years ago, and nearly $130 million last year, based on an industry average for 1995. Those figures may come as a surprise, because most people don't bounce checks. But those who do tend to bounce a lot of checks.

Audio: Sounds of a telephone beeping.

Kate Clancy is dialing into her bank to check the balance on her checking account.

Clancy: It's kinda tedious, but at least you have peace of mind.

Clancy bounces a lot of checks - 16 last year. She says they're the result of a tight budget and miscalculations, like a rent check clearing the day before her paycheck is deposited. Clancy is a single parent who earned less than $16,000 last year. She has pawned possessions to cover bounced check fees, and gone to the food shelf to avoid paying more.

Clancy says she understands her bank, Norwest, wants to discourage customers from overdrawing their accounts, but she says the $21 fee is excessive.

Clancy: If you're going to be writing checks, and you don't know whether you have your money in the account, that's something you shouldn't do. You can get arrested for it. But $20! If I had $20 in my pocket right now, I'd feel all right. That's a lot of money for me. It's a lot of money for anybody who's trying to make it with kids, and trying to get to work and keep the car running. I think they should just be a little more reasonable.

Even though Norwest waived some of the fees, Clancy still paid nearly $300 in bounced check charges last year.

The cost of bouncing checks has risen in the last several years, in some cases, dramatically. Between 1991 and 1995, Norwest's bounced check fee rose at twice the rate of inflation. At $21, it's now slightly higher than the national average for large banks.

Foster: Wow, that's - that's a lot of money.

Richard Foster is a bank consultant who argues high bounced check fees are out of line. Despite profit margins of several hundred percent, he says they're ultimately bad for business. Norwest has not raised its fee since 1995, but other Minnesota banks have. TCF's fee is the highest among the state's largest banks at $23, headed for $24 in October.

Foster: Mmmm. That almost shocks the conscience, particularly when you recognize that, in general, the people who overdraw their accounts don't have very much money in the account to start with, and usually those customers are not in a very good position to argue with the bank or negotiate with the bank concerning the fees.

TCF says banks in other states charge much higher fees, and besides, customers who object can go to another bank. Norwest says customers who complain about the fee will probably be offered the overdraft protection plan, a service that writes an instant loan to cover a check.

But critics argue that banks like customers such as Kate Clancy who often overdraw their accounts, but pay the fees. Clancy says - despite 16 bounced checks - she was never offered overdraft protection. And each $21 fee chews up her income, raising the odds she'll bounce more checks and pay more fees.

Clancy: And that's what bothers me the most, because every time I think I'm going to have a surplus in my account, this happens. And I just, I never get out of the hole.
Whittle: Excuse the term, she's stupid.

Jack Whittle is a nationally known bank consultant who urged banks to raise bounced check fees. He argued customers would not revolt because anyone who writes a bad check expects to be punished for it. Bankers say customers can easily avoid the fee by writing checks only when they have enough money in the account. Whittle says Kate Clancy has no one to blame but herself.

Whittle: She shouldn't have a checking account. A checking account is not for the poor, and the indigent, and everyone. It requires a certain discipline. You've got to add, subtract, write down things, keep records, etc.

Though Whittle criticizes people who complain about bounced check fees, he says there's no question they're a profit center.

Whittle: Oh, it's the most profitable product they got, in smaller banks.

The banking trade press spread the word in the late 1980s and early 1990s that people who don't have the money to cover a check paradoxically are worth a lot of money in fees. One article ran under the title, "Bounced Checks Boost Profits." It encouraged bankers not to shun customers who bounce checks, but to recognize how lucrative they can be. The article even detailed strategies to make customers bounce more checks. "NSF fees are a source of income that's yours for the taking," it trumpeted. The article does not mention that bounced checks are so profitable because the cost of processing them is a fraction of the fees they bring in.

Larson: One of the main things I took from it is that it takes only 20 to 30 seconds to process a check.

Leif Larson spent a summer processing bounced checks for a large Minnesota bank.

Larson: It's a completely standardized process. There's no special care or handling that goes into it, generally. I just kind of came out with the same feeling that I had going in: that this is a profit center for the bank. It's a place for them to make money.
Shields: I found the banks are generating profits of $3 billion a year on bounced checks.

Janice Shields is a consumer rights advocate with the Ralph Nader associated Institute for Business Research, and a thorn in the side of the banking industry.

Shields: The bounced check fee is unconscionable given the huge markup.

The markup can be 500 to 600% or more, according to Shields' research. The Minnesota Bankers Association says the average bounced check fee in Minnesota is around $16, slightly less than the national average reported by the Federal Reserve. Nearly one-fifth of the state's banks charge $20 or more. Shields found processing a bounced check costs less than $3. And Virginia McGuire with the American Bankers Association does not dispute that calculation.

McGuire: That's probably close, But I think it's irrelevant, given that this is a penalty fee in which the bank is trying to discourage you. It is not necessarily real closely tied to the cost, because that is not the intent.

Even some critics of bank policies acknowledge bounced checks are a hazard for banks. Dealing with them can be a costly chore, and each one confronts the bank with unattractive options: let the check bounce and aggravate a customer or cover the check at the bank's own risk.

According to the Federal Reserve, check fraud cost banks, credit unions, and savings institutions an estimated $615 million in 1995. The National Retail Federation says merchants lose even more - over $1 billion a year. Judy Cook of the Minnesota Retail Merchants Association says high bounced check fees are an important weapon in the fight against bad checks.

Cook: It's designed for individuals who just really don't think of this as a problem to write a check and not have the money - they'll pay somebody back sometime. And if there's a high cost associated with that, they will definitely think twice before they do that.

But critics say the bounced check fee is far more effective at generating bank profits than preventing bad checks. The available research suggests the income from bounced check fees for banks alone is enough to cover the entire industry's losses from check fraud - 11 times over. Janice Shields with the Institute for Business Research says industry surveys show raising fees does not push down the incidence of check bouncing. Jordan Ash of the consumer group Minnesota ACORN says there's an obvious reason: most people who bounce checks don't mean to; it's an accident

Ash: And maybe there needs to be a disincentive. We're not saying that there shouldn't be any kind of fee. The problem is that in a lot of these cases the penalty or the punishment doesn't fit the crime. People haven't necessarily done anything wrong - they didn't do anything deliberately - but the price they pay is enormous.

Minnesota ACORN has hounded Norwest Corporation with protests over its fee policies, saying they amount to discrimination against low and moderate income customers - a charge the bank strenuously denies. ACORN says bounced check fees are the most egregious for several reasons: the high mark-up, the burden they place on people most likely to bounce checks, and because the bank's credit policies put overdraft protection out of reach for too many people.

Norwest's Pat Hanson says the fee is set at $21 to discourage customers from bouncing checks.

Hanson: First of all, knowingly writing a bad check is a violation of law. So, we do not believe any customer - regardless of income level - should overdraw their checking account.

Norwest publishes a brochure of tips on how to avoid overdrawing a checking account. But ACORN points out that Norwest has an unpublished policy that can actually force customers to bounce checks and pay fees they would not incur otherwise.

Annette: I was very upset, because - when you're sure you're going to have one NSF fee, but then you wind up with four, it's very upsetting.

Annette knows her way around a bank statement. She used to work in the industry. To protect herself from retribution, she asked MPR to use a fake name.

Norwest processes each day's checks in a sequence determined by dollar amount, from largest to smallest. Clearing the largest checks first drains the account faster, increasing the odds subsequent checks will bounce.

One day last year, six checks cleared Annette's account. Three bounced: $63 in fees.

MPR's computer analysis of her statement shows Annette would have bounced only one check, not 3, if they'd been processed according to more common methods - either by check number or from smallest to largest. Annette estimates the policy has cost her about $200 in excess fees, but she was never informed of it until checks started bouncing.

Annette: If the policy wasn't there, I'd still have NSF fees, but I'd have maybe one, versus four to three.

Pat Hanson of Norwest freely admits the so-called hi/low policy is in place, but she says customers bounce checks, not the policy.

Hanson: We would certainly never have any kind of policy that would encourage people to bounce checks. Because that's not what we want to have happen. We don't force that customer to write a check when they don't have money in the account. I don't know how you can even imply that.

Her position doesn't change, even when shown MPR's analysis indicating Annette had enough money in her account to avoid bouncing two of the three checks.

Hanson: Again, we're not - I can't emphasize enough that we don't want our customers to overdraw their accounts. Ever.

The banking trade press leaves little doubt the practice can be profitable. A 1993 column in American Bankernewspaper anonymously quoted a banker, boasting that his small bank made an extra $80,000 a year after implementing the policy.

Marquette Bank also processes checks largest to smallest. Sources close to the industry say research suggests at least 15% of Minnesota banks do so as well. It's not clear how many inform customers of the practice, but neither Norwest nor Marquette disclose it in their checking and fee brochures, even though it can be costly for their customers. Norwest officials say they don't want to add clutter to the already dense fee disclosure brochure, but say they're planning to add the information in the future.

A small sample of passersby in Minneapolis was unaware of the practice, and did not give the hi/low policy favorable reviews.

Passerby 1: You got a bank to admit that they did that? And if that's what they're doing, then, yeah, NSF fees begin to make me angry. Wow. That's quite a find. You got the bank to admit that?
MPR: It really offends you?
Passerby 1: Doesn't it offend you? Yeah, it offends me. What do you mean? It's clearly them screwing people.
Passerby 2: I am absolutely not surprised that they do that. I think they have a committee meeting daily, settin' there trying to figure out how they can squeeze an extra nickel out of the customer.

Pat Hanson of Norwest says the policy is intended to help customers.

Hanson: Let's just say I've made out three checks, and one is for my house payment. As a consumer I'd want that check to go through, versus maybe a $10 check I wrote at Tom Thumb last night.

That is exactly the rationale recommended by the consultant who wrote "Bounced Checks Boost Profits." Unlike Norwest officials, the article bluntly states the procedure maximizes bounced check fees. Norwest officials say they enacted the policy based on a marketing survey indicating customers support it.

Banking industry sources say the practice is controversial within the industry.

Foster: My reaction was of surprise, and, in fact, outrage.

Consultant Richard Foster wrote a letter to American Banker newspaper, blasting hi/low policies as a rip-off. He also criticizes policies that allow bounced check fees to pile up. First Bank, for example, will charge customers as much as $252 in one day if a dozen or more checks bounce. And Foster says he's skeptical of the industry's rationale for the price of bounced check charges.

Foster: It should charge the customer what it costs the bank to handle the check, plus a modest profit, and that's all. I don't see any validity in the thought that banks should charge customers a lot for overdrawn checking accounts because it wants to discourage them. To the contrary, the bankers say they're making a lot of money.

Foster says banks may be harming themselves with excessive fees. He says the sting of high service charges drives customers to credit unions and other bank competitors. Credit unions tend to be less costly than banks, and saw record quarterly growth in new checking accounts earlier this year. At the same time, American Banker newspaper reports the percentage of consumers using banks as their primary financial institution is declining significantly. Foster says fees may hurt banks in state legislatures as well. Bankers often carp about onerous regulations, but Foster says their fees may invite more.

Foster: I would urge banks who are charging high fees on overdrafts to think very carefully, long-term, about what effect that is going to have on their customer loyalty. And even more importantly, what their local legislators might do in the context of telling them how to run their bank and price their services.

This year, Minnesota lawmakers are expected to consider proposed legislation that would subject checking account charges to approval by the state commerce commissioner. The legislation would prevent the state and Minnesota cities from banking with institutions that do not offer so-called life-line bank accounts, with bounced check fees capped at $15 when checks are paid, and $10 if the bank refuses to cover the check. Processing checks high to low would be banned for those accounts. Both the Minnesota Bankers Association and the Minnesota Retail Merchants association oppose the plan.

Banking on Fees

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