Academic journal article The University of Memphis Law Review

How Your $4 Coffee Can Cost You $39 or More If You Use Your Debit Card! Federal Level Consumer Protection and Modern Payments Transactions

Academic journal article The University of Memphis Law Review

How Your $4 Coffee Can Cost You $39 or More If You Use Your Debit Card! Federal Level Consumer Protection and Modern Payments Transactions

Article excerpt

INTRODUCTION

Who wants to pay $39 for a $4 cup of coffee? Emma, a university student, goes into her local Starbucks for a cup of her favorite Java Chip Frappuccino®, which runs about $4.75. Emma's bank account had been down to less than $5, but she made a deposit yesterday after her mother sent her some much-needed cash in the form of a $500 check. Emma made $60 of purchases using her debit card through Amazon.com and put $20 of gas in her car using the debit card, but none of these purchases presently appear in her transaction ledger for her online banking. Emma has cash in her wallet, but there should be no problem in using her debit card, right? Well, maybe.

Bank debit cards may look like credit cards, but they certainly do not act like them when it comes to account overdrafts.1 This does not suggest that credit cards are better than debit cards, as complaints abound concerning the transparency of fees charged to consumers for credit card transactions as well.2 Nevertheless, consumers are more familiar with the workings of credit cards, often not realizing that credit and debit overdraft charges work differently. First, many credit card companies will deny a customer charge at the counter if the charge would result in the customer exceeding her credit line. Second, if the bank approves the charge regardless and permits the consumer to exceed his or her credit Une on a credit card, the typical bank imposes a charge averaging well over $27.3 This credit card over-the-limit fee, however, is a monthly charge, rather than a per-transaction charge that is commonplace for debit card transactions that exceed a customer's bank account limit.4

Bank overdraft services operate at high costs to consumers. According to the Consumer Federation of America, the average national overdraft fee at the ten largest banks is $34.65, with consumers paying $1.75 billion in annual fees to banks for overdrafts resulting from checks, debit card purchases, automated teller machine ("ATM") withdrawals, and preauthorized transactions.5 Very few banks have caps on the amount of overdraft fees that can be charged in a single day on debit transactions, and those that do cap fees have very high daily limits. For example, Bank of America caps its daily overdraft fees at $245. 6 Many large banks also often "batch" reorder daily transactions from highest to lowest, a process that increases the number of overdraft fees banks charge.7

A customer like Emma may have debit overdraft protection that she did not ask for, as banks typically enroll customers in debit card overdraft protection automatically without affirmative customer consent or request.8 The practice of overdraft protection on debit card transactions persists even though many overdrafts occur on small debit card transactions for which consumers might genuinely prefer the bank deny on the spot, rather than get a $34 overdraft charge. Accounts held by young adults such as Emma and individuals with low incomes account for the largest portion of overdraft charges, with most overdrafts occurring on point of sale ("POS") debit transactions.9

The federal government has hardly noticed consumer issues related to newer payment systems such as debit cards until recently. For instance, the Department of the Treasury's Blueprint for a Modernized Financial Regulatory Structure ^Blueprint') sets forth the current structure for federal regulation of consumer protection, mainly described in the Truth in Lending Act ("TILA").10 The TILA requires meaningful disclosure of credit terms for both credit card and mortgage transactions.11 The Federal Reserve, however, found that TILA does not extend to debit card transactions.12 The Blueprint provides few specifics about consumer protections in regards to financial transactions generally, and nothing specifically about the issues of debit cards. This lack of mention in the Blueprint is not anomalous. For instance, the recent Government Accountability Office ("GAO") Report entitled, "A Framework for Crafting and Assessing Proposals to Modernize the Outdated U. …

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