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Bank of America Settles Debit Card Fee Suit: Should We Be Celebrating?

Banking

What, you think the Bank of America coverage would stop after Bank Transfer Day? Oh, ye of little faith. Less than 48 hours after Guy Fawkes Day, which was in no small part instigated by BofA’s $5 debit usage fee, the bank made the headlines. For its debit card fees. Again.

And this time, too, it’s debatable whether customers should actually celebrate: a federal judge approved a $410 million settlement in a class-action lawsuit over improper overdraft fees, despite customers’ protests that it was not nearly enough.

The case: The lawsuit alleged that Bank of America processed debit card transactions in order from greatest to smallest, to maximize overdraft fees. For example, if you had $100 in your checking account and made $5, $50 and $110 purchases (in that order), BofA would process the $110 charge first and the $5 charge last. That way, instead of incurring the overdraft fee only once (when you tried to deduct $110 from $45), you’d get slapped three times (trying to deduct $110 from $100, and subsequently $50 and $5 from a negative balance).

The settlement: 13.2 million BofA customers who had debit cards between 2001 and May of 2011 will receive part of the settlement: a minimum of 9% of the fees they paid. The average customer incurred $300 in overdraft fees, so he’d be eligible for $27. Bank of America denies any wrongdoing, and this practice has since been outlawed by the Electronic Funds Transfer Act.

The verdict: US District Judge James Lawrence King signed off on the settlement, saying that it was fair and reasonable even though the average consumer stands to receive less than the amount of one overdraft fee. Small miracles?

So who won? Like everything surrounding Bank of America’s debit card fee fiascos (and yes, there are enough of them to warrant their own categorization), things are not always what they seem. In this case, yes, consumers are getting some of their money back. But Bank of America doesn’t have to admit wrongdoing, and it doesn’t have to fight a lengthy and credibility-straining court battle. It’s escaped with returning less than 10% of the overdraft fees it collected in the aughts.

It’s Bank Transfer Day all over again: consumers may get money, but Bank of America gets a pretty big break. When pissed-off customers withdrew their money, BofA got what it wanted – the closure of non-lucrative accounts. And now, it’s paying only $410 million, a drop in the bucket compared to what it earned in the past decade.

Post-Regulation E: The protections enacted by the EFTA relating to overdraft protection have come to be known as Regulation E. They ban the practice of processing transactions in anything other than chronological order, and require consumers to opt in to each and every overdraft fee. Banks can’t discriminate against customers that don’t opt in, and must give them the same account features and benefits.

We see this as a significant step forward for consumers. Though banks continue to sell “overdraft protection” and consumers still decide to suck up the $35 overdraft charge, more transparency means better decision-making. However, the sharp reduction in overdraft charges, combined with the Durbin Amendment’s regulation of interchange fees, has made debit cards far less profitable and banks more eager to shed their checking account customers.