Steve Daniels

November 6, 2006 

Banks allow ATM overdrafts without warning — for a fee

Marian Hobbs always assumed that when she got money from
a cash machine, it meant she had enough in her account to cover the withdrawal.
But about a year ago, she opened her monthly statement from Harris Bank to
learn that she’d overdrawn her account at an ATM — and incurred a fee of more
than $25.

"It floored me," she says. "They shouldn’t
have given me the money that wasn’t there."

Ms. Hobbs learned the hard way about a practice that
consumer advocates say is all too common among Chicago’s
big banks. Harris is just one that permits ATM overdrafts. And many — Harris
included — do so with no onscreen message warning customers that they are about
to overdraw their accounts or that they’ll pay a flat fee, ranging from $29 to $35
per transaction.

For banks, criticism of the practice has been outweighed
by the lure of additional deposit charges at a time when minimum-balance and
transaction fees on checking accounts have mostly fallen victim to intense
retail competition.

"We thought it would be not only a service to
customers, it would be a revenue source," says Allen Koranda, CEO of Mid
America Bank, which last spring changed its ATMs to allow overdrafts.

A survey of the largest Chicago
retail banks finds a wide array of policies regarding ATM overdrafts, but most
permit them.

Chicago’s top
three banks each have a different approach. J. P. Morgan Chase & Co.
doesn’t allow them. LaSalle Bank N.A. does, but only after customers get an
on-screen message saying they’ll incur a $32 fee if they go forward.

Harris allows overdrafts without warning customers that
they’re overextended or that they’re about to incur a fee, an approach consumer
advocates, and even some bankers, find troubling. The area’s next-largest
retail banks by deposits — Fifth Third, Charter One and MidAmerica, with a
combined 326 local branches — use Harris’ approach. So do Seattle-based
Washington Mutual Inc., with more than 160 branches, and Minnesota-based TCF
Bank, with more than 200 local branches. (TCF is set to test a system soon that
would warn ATM customers when they are overdrawing their account, but the bank
hasn’t committed to making it permanent.)

IT’S ON THE RECEIPT

A Harris spokeswoman notes that receipts spit out by ATMs
at the end of transactions would indicate a negative balance. If customers
notice it, "As long as they cover (the overdraft) by the end of the day,
they don’t face any fees," she says.

"We view it as a benefit to customers," she
adds.

That’s not how critics see it.

"It’s a loan that’s actually more expensive than
most loans you would get at a payday loan store," says Tom Feltner, policy
analyst for the Woodstock Institute, a Chicago non-profit that advocates for
access to financial services in low-income communities. "That’s a practice
banks probably should not engage in, particularly if it’s not disclosed to a
consumer through their own ATM network."

Mr. Feltner and other critics say the least banks could
do is notify ATM users that their withdrawal is subject to an overdraft fee and
allow them to back out before they incur it. Last year, federal bank regulators
encouraged overdraft notification by labeling it an industry best practice,
although they don’t require it.

Banks haven’t shown much inclination to give up the fat
fees, but some have moved away from the more controversial practices.

Chicago-based MB Financial Inc. earlier this year changed
its policy regarding what it refers to as "available" balances. In
the past, when a customer asked to see an available balance, the machine would
display a figure that included the amount allowed to be overdrawn — in other
words, the cash balance plus the overdraft limit — potentially confusing the
customer about how much money was in the account. Now, the balance just shows
what’s in the account.

"We want customers to manage their accounts in an
appropriate way and only overdraft when they need to," says MB Financial
CEO Mitchell Feiger.

When customers don’t manage their accounts well, it’s
good for a bank’s bottom line. In the third quarter, MidAmerica’s parent,
Clarendon Hills-based MAF Bancorp Inc., attributed some of its 22%
year-over-year increase in deposit account service fees to "higher
consumer overdraft activity due in part to allowing overdrafts at ATMs,"
according to the company’s most recent earnings release.

The fees are a big boost to profits, compared with banks’
other remaining source of checking-account income: debit card transactions.
Such purchases result in small interchange fees merchants pay. But those fees
"come nickels and dimes at a time," notes Greg McBride, senior
financial analyst for Florida-based Bankrate.com, an online data provider on
bank products. "Bounced-check fees come $25 and $30 at a time."

Some bank executives say changing cash machines to
disallow overdrafts requires expensive and sometimes difficult technical
modifications. Mr. Feiger says he’d like to warn consumers before they
overdraw, but he hasn’t committed to changing the ATM system. "We get it
from a third-party provider, and it’s not easy to change," he says.

The Harris spokeswoman echoes that. "Right now, we
don’t have the technology."

Meanwhile, consumer outrage over overdraft fees may be
tempered by a tendency to blame the one who balances the checkbook.

Bart Pascoli, a WaMu customer who works downtown at the
Italian consulate, didn’t know he could overdraw his account at an ATM, but he
says he always checks his account balance onscreen before withdrawing cash.
"Everyone should," he says.

Even Ms. Hobbs, the 56-year-old downtown resident who
incurred an overdraft fee from Harris last year, is quick to accept blame.
"It’s my responsibility," she says.