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Political Economy
Posted at 12:10 PM ET, 04/27/2011

Consumer advocates, industry groups wage battle over bank fees

The war over Americans’ checking accounts raged on Wednesday as consumer advocates and industry groups waged battles over a bevy of bank fees.

In one development, the influential nonprofit Pew Charitable Trusts issued a report criticizing the size of banks’ overdraft fees.

Meanwhile, the debit card industry suggested the prospect of a new disaster: a massive cybersecurity data breach if regulators cap the fees merchants must pay each time a customer swipes a debit card..

The Pew group studied 250 checking accounts offered by the country’s 10 largest banks and found that the median overdraft fee was $35, up from $27 in 2007. But because many banks allowed multiple overdrafts per day, the daily penalty could total $140 or more, the report said.

In addition, the report found that many banks processed withdrawals before deposits and large debits before small ones – increasing the chance that a consumer may overdraft. However, it also acknowledged that several large banks, including Wells Fargo, Chase and Citibank, are modifying that practice.

“We need to ensure that everyone gets those same kinds of rights and protections,” said Shelley Hearne, managing director of the Pew Health Group. “It’s a common sense fix.”

Federal regulators have already taken steps to curb overdraft fees. Last year, banks were forced to ask consumers to opt-in to overdraft services for one-time debit card purchases and ATM withdrawals. However, banks can still charge the fee for withdrawals by check and automatic bill payments.

The Federal Deposit Insurance Co. recently called for the 5,000 community banks under its jurisdiction to set “appropriate daily limits” on overdraft fees. Under the weight of all the new rules, many banks have dropped their overdraft programs all together.

According to consulting firm Moebs Services, the stricter overdraft rules have cost banks roughly $6.3 billion so far. The hit to their bottom line has put many financial institutions on guard against other government regulations.

“The Wall St. Banks appear to have lost revenue from overdrafts and now see costs of checking accounts greater than revenue,” said Michael Moebs, who runs the firm.

Banks are also engaged in an 11th hour fight to preserve the fees merchants must pay them each time a customer swipes a debit card.

The Federal Reserve has proposed capping those payments -- known as interchange or “swipe fees,” depending on which side you’re on -- at 7 to 12 cents per transaction. That would reduce banks’ revenue from the fees by about 75 percent, prompting the industry to warn of the end of free checking and the disappearance of debit card reward programs.

On Wednesday, the card industry said a massive cybersecurity data breach could also be the result.

Debit card fees help pay for banks and the networks that process the transactions, namely Visa and Mastercard, to combat fraud and identity theft. That means reducing the fees could threaten the security of the global payments system that underpins the economy, according to industry groups.

To hammer home the point, Visa is holding a “Global Security Summit” that is slated to feature former CIA Director Gen. Michael V. Hayden overseeing a simulation of a data security breach. The company also called on other heavyweights such as former Homeland Security Director Michael Chertoff to make its case.

The new regulation “has the potential to chill investment in security or even undermine today’s consumer protections,” said Ellen Richey, Visa’s chief enterprise risk officer.

For their part, merchants have framed the fees as a hidden tax on consumers and a burden on small businesses. Lower the fees, they say, and the cost savings will be passed on to shoppers.

The Fed was supposed to release its final version of regulations last week but missed its deadline. The law is slated to take effect July 21, though industry groups are trying to drum up support for proposals to delay implementation and study the issue.

By  |  12:10 PM ET, 04/27/2011

 
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