A newly emerging form of overdraft protectiontouted by some banks and credit unions as a big benefit to customers and members, but criticized by some consumer groups as exploitativeis gaining a strong foothold here.


Two of Spokanes largest financial institutions, Washington Trust Bank and Spokane Teachers Credit Union, have introduced the service, known informally in the industry as bounce protection, over about the last six months, and both say it already is generating positive response.


Also, Seattle-based Washington Mutual Bank, which has a sizable presence here, is said by a Boston-based consumer-advocacy group, called the National Consumer Law Center, and the New York Times to be the apparent largest provider of bounce protection nationally.


With traditional overdraft protection, financial institutions tap a savings account, money-market account, credit card, or line of credit to cover a checking-account overdraft, typically after the customer has explicitly requested or agreed to that service.


On an occasional ad hoc basis, they also may opt to cover a bounced check for a customer as a courtesy.


With bounce protection, they cover overdrafts routinely up to a set dollar amount, from $100 to $1,000, and charge a flat per-item feetypically $17 to $35, or about the same as a non-sufficient-funds (NSF) feefor each overdraft.


In some cases, bounce protectionor overdraft privilege, as it also is calledcan extend to customers automated-teller-machine accounts and debit cards. The institutions then deduct the overdrawn amount, plus fees, from the next deposit. Overdrafts must be repaid or accounts brought to a positive balance within a certain period of time, generally ranging from a few days to 30 days.


The program is provided automatically to most checking-account holders in good standing, and thus covers a much larger group of people than traditional forms of overdraft protection, which many people cant use or dont pursue due to a lack of savings, good credit history, or desire.


Its just a nice service to have, to know that youre protected and your check wont bounce, says Lisa Phillips, vice president of marketing at Washington Trust Bank.


Steve Dahlstrom, president and CEO of Spokane Teachers Credit Union, says the industry trend toward bounce protection and the public demand for it appear strong enough that, I think it will become a standard feature of most checking accounts.


The National Consumer Law Center claims, though, that some banks are aggressively marketing bounce protection to boost their fee income at the expense of the most vulnerable consumers. It contends theyre encouraging consumers to overdraw their accounts, and that the fees can be astronomical.


This is the banks answer to payday lending, asserts Chi Chi Wu, a staff attorney for the nonprofit organization, which specializes in consumer issues on behalf of low-income consumers.


The center claims that consultants who promote bounce protection to banks and other financial institutions repeatedly emphasize increases in fee income of up to several hundred percent as the major selling point.


Regulatory reviews


The NCLC is urging the Federal Reserve Board to adopt a number of measures to regulate bounce-protection programs, including requiring Truth in Lending Act annual percentage rate disclosures.


Other proposed measures would prohibit banks from imposing bounce protection on consumers without their consent, and from seizing customers exempt funds, such as welfare and Social Security checks, to repay overdraft-protection debts.


The NCLC also is urging the Fed to prohibit deceptive advertising of bounce-protection plans, saying some advertisements use deceiving language to entice consumers with the availability of credit.


The Feds 30-member Consumer Advisory Council solicited public comment on bounce protection late last year, and heard testimony on it at a March hearing in Washington, D.C., but has yet to issue any findings or recommendations.


Meanwhile, Washington state regulators also have noticed the growing trend.


At the urging of legislators, the state Department of Financial Institutions recently sent a letter of inquiry to all banks and credit unions in the state seeking information about their overdraft-protection programs.


The deadline for responses was three weeks ago, and department spokesman Scott Kinney, says, Right now were compiling that information and deciding if we need to send out any form of guidance to the industry to let them know how they should be handling the situation.


John M. Floyd, a Houston-based financial industry consultant warned the Feds Consumer Advisory Council at its spring hearing that regulators can expect a consumer revolt if overdraft programs at banks and credit unions are terminated.


Floyd is CEO of Houston-based John M. Floyd & Associates, a 30-year-old bank profitability consulting firm and one of a small number of consultants across the country that help banks set up and market bounce-protection programs. He claimed in his testimony that more than 1,500 of the nations nearly 18,000 financial institutions now offer bounce-protection programs and that others are considering implementing them as a way to boost their non-interest income in the soft economy.


Bounce protection has been around for many years, but only recently has become a high-profile topic in the financial industry.


Rising consumer interest in it probably stems partly from the slow economy, which means more people are living from paycheck to paycheck, industry representatives say. All of those interviewed say they expect the service to become more common.


Favorable response


Phillips, at Washington Trust, says more than three out of four respondents in a recent national survey conducted by the American Bankers Association said they would find very or somewhat useful a bounce program that charged a $25-to-$35 fee to cover an overdraftrather than let the check bounce.


Washington Trust introduced its bounce-protection program, called Pay Advantage, in late June and sent out an introductory letter explaining it, Phillips says. Its being provided to most of Washington Trusts personal-banking customers, and, It actually has been received quite well, she says.


The bank charges a per-item fee of $24the same as its NSF fee for returning a checkto cover an overdraft.


The amount of overdraft coverage has a set dollar limit that varies depending on the customer, she says.


Although the banks charge is the same as for its NSF fee, customers avoid having to pay bad-check fees and late-payment charges that also might be charged by check recipients.


Contrary to critics complaints that some banksmotivated by the desire to boost fee revenuebasically are encouraging consumers to write bad checks, Phillips says, Our communications program is set up to watch for that (to avoid conveying that kind of message). We expect payment right away, so were certainly not encouraging that type of behavior to continue. We see this as a service.


Dahlstrom, at Teachers Credit Union, made similar observations, saying, Our goal is not to bounce checks; our goal is to keep members from bouncing checks. Our approach is to try to find ways we can pay the check, and save the member embarrassment.


Teachers implemented its bounce-protection program, called Courtesy, about six months ago, and, Id say overwhelmingly members like it, he says. Nobodys called me to say they dont like this.


Also, Dahlstrom says, I can tell you it has cut the number of checks weve returned by about 75 percent.


Under the program, the credit union charges a per-item fee of $25 to cover an overdraft, which is $5 more than the NSF fee it charges if it bounces a members check, up to a $500 overdraft limit.


Most people are happier to pay the $25 than the $20 because there they dont have fees from the merchants in addition, Dahlstrom says.


The credit unions typical way of dealing with overdrafts is to look first at members savings accounts, then credit cards and lines of credit, to see whether money is available to cover the cash shortages, and most overdrafts far and away still are handled through one of those traditional methods, he says.


Nevertheless, he defends bounce protection against critics, saying, Its odd to me that people would be concerned about a fee. Its part of your account. Its really for the people who make an error.


He adds, Every overdraft fee Ive ever charged could have been avoided. I dont have sympathy for people who dont want to pay for a service that provides added benefit to them.


John Annaloro, president and CEO of the Washington Credit Union League, which represents about 150 credit unions in the state with 2.2 million members, says hes aware of only a few credit unions that are offering bounce protection so far, but that he expects that number to grow.


Aside from the benefit provided to members, he says, such programs allow the credit unions to cover their costs and just to make sure that those members that cost the institution the most money are paying their fair share. He adds that from what he can tell, Its being done pretty responsibly.


Annaloro says, A lot of focus has been put on this issue by consumer groups because the potential exists (for financial institutions) to make a lot of money on these programs.


However, the profiteering allegations being made by some critics nationally are a non-issue in the credit-union field, he contends, since credit unions are nonprofits that use earnings to support operations.


Regardless, he says, I think most consumers prefer having these programs in place, because of the embarrassment, wasted time, and added costs associated with making good on bad checks.


I would think the more focus that comes to this issue, the more demand there will be, frankly, to offer this product, Annaloro says. I would say this is a trend in banking in general, but its a good trend. When done right, its a great trend.


Washington Mutual has been offering its bounce-protection program, which it refers to as its overdraft limit practice, since 1995, and says its research shows that consumers overwhelmingly like it.


It charges a $22 fee per overdraftthe same as its NSF feewith a maximum of five charges per day. The overdraft limit can vary monthly, between $100 and $1,000, based in part on the accounts average balance.


An NSF check carries a fee whether or not the check is paid, so it is not surprising that customers prefer to have the check paid rather than returned, the bank says.


It says its overdraft limit practice is not a line of credit and we do not market it as such. No one should be dependent on our practice to pay routine expenses. Washington Mutual also says it makes a pointed effort, through various means, to make sure customers understand overdraft limits and the fees they will incur for NSF checks.


Some of the banks with operations here dont offer bounce-protection programs. San Francisco-based Wells Fargo Bank, for example, doesnt have such a service, and, I dont think were even considering it, says Amy McDevitt, a Boise-based spokeswoman for the bank.


She says, though, that the bank does offer a direct-deposit advance service through which customers who have their paychecks deposited directly in Wells Fargo accounts can obtain cash advancessuch as in cases of minor financial emergencyfor a fee of $1.50 for every $20 advanced.


The number of advances made through that service has nearly doubled over the last year in the banks region that includes Idaho, the Spokane area, and a couple of markets in Western Oregon, she says.