Banks are doing a better job of informing consumers about the costs associated with their checking accounts, but more regulation is needed to ensure that the terms are fair and transparent, according to a report issued by Pew Charitable Trusts on Thursday.
Pew researchers examined checking accounts offered by 36 of the nation’s biggest banks, including how effective they were in providing clear cost disclosures and reducing incidences of overdrafts in which consumers are charged a fee for spending more than they have in their accounts.
Ninety-seven percent of banks received high marks in at least one category, although none got a thumbs up across the board. Ally Bank received the highest marks, followed by Charles Schwab, First Republic Bank, Citibank and Bank of America. On the low end of the scale were First Tennessee Bank, Sovereign Bank, Union Bank, KeyBank and First Niagara Bank.
“While a majority of the banks [improved], there is still lots of room for improvement,” said Susan Weinstock, director of the Safe Checking Project at Pew. “The [Consumer Financial Protection Bureau] can take action in a number of ways to clear up some of these problems with overdraft.”
The study is the latest by the nonprofit organization to examine the transparency of checking accounts in the aftermath of the financial crisis. Banks became increasingly reliant on a variety of fees charged to consumers as the economy sputtered. Lawmakers and advocacy groups complained that some institutions were raising fees and pinching consumers while receiving taxpayer bailouts.
The backlash led to changes in the way banks handle overdrafts. Banks, for example, can no longer automatically cover an overdraft deficiency and charge a fee if the customer has not opted in to such a program.
The CFPB is studying the effect of overdraft services on consumers and plans to publish its initial findings this year.
Overdraft revenue crept up 1.3 percent, to $32 billion, in 2012, but that was still far from the 2009 peak, according to the most recent data from Moebs Services. At the current rate of growth, the research firm projects that overdraft revenue will hit an all-time high by the end of 2016.
Pew is calling on the consumer bureau to curtail banks’ ability to maximize overdraft fees. One way would be to prohibit transaction reordering, the practice of processing transactions from largest to smallest to trigger more overdraft fees, Weinstock said. The consumer watchdog could also make overdraft fees, which are typically $27 to $30 per incident, proportional to what it costs the bank to provide the service, she said.
But the banking industry says it doesn’t need more regulation. “Do we expect Apple to limit its price to the cost of producing the iPad?” said Nessa Feddis, vice president of the American Bankers Association. “Businesses have to recover more than just the cost, otherwise why does the business exist?”
The Pew study shows that banks have improved their overdraft practices without additional prodding from regulators, she said.