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Pew: Bank practices slowly improving

By Allison Ross ·
Friday, April 11, 2014
Posted: 10 am ET

The country's largest banks are doing a better job with their disclosure policies on checking accounts, according to a study released this week by the Pew Charitable Trusts.

But other policies that can trip up consumers still remain at many banks, the study found. For instance, about half the banks studied still reorder consumer withdrawals from high to low, which could mean consumers who overdraft pay more in fees.

"There's lots of room for improvement from banks in providing safe and transparent checking accounts," says Susan Weinstock, director of Pew's Safe Checking project. She notes that checking accounts are a basic product that many consumers use all the time, and she urges the Consumer Financial Protection Bureau to issue rules on safe checking practices.

Reordering withdrawals

Pew's study was critical of a technique used by some banks to reorder transactions from highest to lowest dollar amount. Pew says this reordering can be harmful to consumers who overdraw because they have to pay multiple overdraft fees on sometimes small amounts.

Take for instance this example of a consumer who starts with $150 in her account, then makes a number of purchases, returns and ATM withdrawals in one day. On the left is her account if it's not reordered, and on the right is her account if it's reordered from high-to-low dollar amount:

Account not reordered

Transaction Amount Balance
Beginning balance $150.00
ATM withdrawal ($20.00) $130.00
POS purchase ($17.23) $112.77
POS purchase ($3.23) $109.54
POS return $17.23 $126.77
POS purchase ($8.10) $118.67
POS purchase ($77.39) $41.28
Check ($80.00) ($38.72)

In this instance, there's only one overdraft fee. Given the $35 median withdrawal fee, this customer would pay $35 in fees.

Account reordered

Transaction Amount Balance
Beginning balance $150.00
POS return $17.23 $167.23
Check ($80.00) $87.23
POS purchase ($77.39) $9.84
ATM withdrawal ($20.00) ($10.16)
POS purchase ($17.23) ($27.39)
POS purchase ($8.10) ($35.49)
POS purchase ($3.23) ($38.72)

In this instance, there are four overdrafts. Given the $35 median withdrawal fee, this customer would pay $140 in fees.

Source: Pew Charitable Trusts

Pew's study found that fewer banks reorder accounts than the numbers who used this practice last year.

Disclosure policies

Pew found that 28 of the 44 banks that shared their checking disclosure terms for the study make disclosure boxes available to consumers. Of those, 19 meet Pew's disclosure rules, it says.

The number of banks offering disclosure boxes has increased significantly from last year's study. Last year, 22 percent of the banks studied had disclosure boxes that satisfied Pew. This year, that jumped to 43 percent.

Disclosure boxes can make it easier for consumers to understand the terms of their checking accounts. Pew's study found the median length of disclosure for checking account agreements and fee schedules is 44 dense pages.

Other overdraft policies

The Pew study found that many banks charge an additional fee when a customer fails to pay the amount overdrawn as well as the overdraft fee, within a certain period. Five days is still the median number of days before the extended overdraft fee is charged.

Meanwhile, the study found that more banks have instituted a minimum purchase amount threshold -- the median being $5 -- before an overdraft would be triggered. That keeps small purchase amounts from racking up high fees. In addition, more banks limited the number of overdraft fees that can be charged in a single day.

Some banks fare better than others

Pew ranked the banks it studied based on a set of 18 best and good practices it delineated. Online bank Ally Bank scored the highest, with Pew saying it met all the good and best practices.

When it came to overdraft practices, Charles Schwab Bank, USAA Federal Savings Bank and OneWest Bank also scored the highest.

Want more? Here are six ways to avoid pesky overdraft fees.

Follow me on Twitter: @allisonsross.

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