How America's biggest banks boost your fees

Overdrafts, once used as a short-term accommodation to bank customers, have turned into a fee-for-all. Only six of the nation’s 50 largest banks restrict overdrafts with consumer-friendly policies. The remaining 44 engage in one or more practices likely to nick their customers with overdraft fees, according to new research by the Pew Charitable Trusts. 

The six institutions that follow consumer-friendly policies when it comes to overdraft fees are: Ally Bank (ALLY), Charles Schwab Bank (SCHW), Discover Bank (DFS), HSBC (HSBC), USAA and Citibank (C). They all deny ATM and point-of-sale transactions that would result in overdrafts and don’t engage in so-called “high-to-low” transaction reordering, which tends to boost the number of overdraft fees a consumer might trigger in any given day, according to Pew research.

In addition, they cap overdraft fees at a set number per day or month, waive fees on small-dollar missteps and don’t charge for extended overdrafts.

What do the other big banks do?

41 percent “reorder” consumer transactions by deducting the largest debits first. This practice can vastly increase the number of overdraft fees a consumer might trigger in a single day. Consider a hypothetical consumer, Susan Smith, who had $500 in her checking account in the morning, but bought a $5 coffee, a $10 sandwich, a $20 scarf and a $50 pair of shoes, before she completely blew her holiday shopping budget by spending $455 at Costco.

If the bank took those transactions in order, she would trigger just one overdraft fee, at an average cost of $35. However, if the bank reordered her transactions from high to low, as two in every five big banks do, she would pay four overdraft fees -- $140 total – because the transactions would be taken out of chronological order to deduct the final $455 charge from her balance first and the $50 charge next.

That would cause four of the five transactions made that day to trigger separate overdraft fees.

52 percent charge “extended overdraft fees.” These are a second fee, typically $20, to penalize consumers for failing to bring their balances above zero within five days of the original overdraft.

80 percent allow real-time insufficient funds transactions -- such as point-of-sale purchases and automated teller withdrawals. The bank could simply deny to process a sale or withdrawal transaction that would trigger an overdraft, according to Pew, but only 20 percent of the nation’s biggest banks choose to do so.

Notably, small banks engage in similar practices, but are somewhat less likely to reorder transactions to boost overdraft fees. According to a related Pew Trust study issued Tuesday, 68 percent of small banks don’t reorder transactions under any circumstances.

Pew researchers say the findings of the two studies indicate that consumers need small-dollar loans, rather than overdrafts, to cover short-term cash-flow problems.

“Overdraft products ... should not be allowed to continue functioning as extremely expensive credit, particularly for the financially vulnerable consumers who use them repeatedly,” the study said. Pew also said regulators should limit the size, frequency and overall cost of overdrafts and promote affordable small-dollar loans.