How to avoid bank penalty fees

The announcement of a class action against Australia's big banks for fee gouging reinforces why customers need to scrutinise their statements.
 
Learn more
 
 
 
 
 

01 .The low down on penalty fees

$name

Are you being stung by high penalties for overdrawing your account, paying your credit card bill a day late, or making a direct debit and cheque payments that bounces due to insufficient funds in your account? You’re not alone. This year it emerged that banks are raking in almost $1 billion per year in fees from consumers, and that doesn’t include similar fees that other financial institutions like building societies, credit unions and non-bank lenders are charging.

Some of these contract penalties — for exceeding your credit card limit, overdrawing your account and having a direct debit dishonoured, for example — are excessive (they seem to be a lot higher than the problem costs the bank) and therefore unfair, and probably legally unenforceable. See our Banking section for ideas on how you can get a better deal from your bank, in particular our story on how to switch to a low-fee transaction account.

Our campaign to help you reclaim the fees and to put pressure on banks to reduce them has had some great successes. Thousands of consumers have downloaded our information to help reclaim unfair penalty fees, while public pressure has seen all of the five major banks announce fee reductions. The table below shows the new fees that apply, in some cases from December (see table notes).  

BankDishonourOverdrawn accountCredit card late paymentCredit card over limit
ANZ
$6 (A)
$6 per day (A)
$20 (A)
$20 (A)
Commonwealth
$5
$10
$25
$25
National Australia
$0
$0
$5 (B)
$0 (B)
St George
$9
$9
$9
$9
Westpac
$9
$9
$9
$9
 

Table notes

  • Source: the banks’ websites.
  • Dishonour fee applies to periodic payments, direct debits and cheque payments from your account that are rejected due to insufficient funds.
  • (A) From 15 December 2009.
  • (B) From 4 December 2009.

Current fees from the big banks shows account penalties from the five largest banks that continued to apply until October 2009. These are the fees charged on standard accounts (some banks have reduced the penalty fees on concession and basic accounts).

What needs to change

CHOICE wants urgent action to address the problem of penalty fees, including:

  • Banks should provide justification for their penalty fees — even in cases where they’ve been reduced. Without that, we don’t know if the penalty bears any relation to the costs incurred by the bank.
  • Inward cheque dishonour fees should be eliminated by all institutions. It’s clearly not your fault if someone writes you a cheque when there isn’t enough money in their account to cover it.
  • Direct debit dishonour fees Financial institutions should give options to customers before processing transactions on accounts with insufficient funds, giving them an opportunity to avoid the fee. It’s unfair to charge the customer for direct debit dishonours — the bank doesn’t provide any service when an automatic payment like this is declined.
  • Over-limit credit card fees should either be eliminated or set at a reasonable level (these fees didn’t exist seven years ago and are now over $30). Customers should be notified that the transaction would cause their credit limit to be exceeded and be given an option to have the transaction declined at no cost, or processed with a reasonable fee.
  • All other penalty fees should be related to actual costs incurred by the institution.
  • All basic/concession bank accounts should eliminate or dramatically reduce penalty fees. You can open a basic/concession account if you have a Commonwealth Government Health Care, Seniors Health or Pensioner Concession Card — see How to avoid penalties for more.
  • The Financial Ombudsman Service (FSO) should be able to investigate consumer complaints about penalty fees and make a ruling on whether they’re excessive and legally enforceable. At present, the FSO says its Terms of Reference don’t allow it to consider the amount of a disclosed default fee. CHOICE isn’t convinced this is correct, but if it is, we think those terms of reference need to be reviewed.

Since the start of our Fair go on fees campaign, some of these fees have been reduced. You can read about developments at campaign news.

 
 

Sign up to our free
e-Newsletter

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.

 

In 2004, a groundbreaking report (PDF) by Nicole Rich, now of the Consumer Action Law Centre, argued why some bank penalties are likely to be legally unenforceable:

“A contract penalty is considered ‘excessive’ — and therefore unenforceable — if it’s not a genuine pre-estimate of the loss suffered by the bank as a result of the customer breaching a term in their contract.”

“And there’s a second argument in Victoria, the only state with Unfair Contract Terms legislation, that some penalty fees represent an unfair contract term, making them null and void.”

Not just the banks

Some other penalties are also blatantly unfair, and it’s not just banks that charge them:

  • The largest credit union, Credit Union Australia (CUA), for example, charges you $9 (previously $15) when someone who writes you a cheque doesn’t have enough money in their account to cover the transaction (the person who wrote the cheque would also be charged a penalty by their own financial institution). Until 2007, CUA charged $20, but reviewed the fee and reduced all dishonour fees by $5 following the launch of our campaign. Credit unions claim that on average their penalty fees are lower than banks’. In 2008, CUA told us "We are keeping pressure on our bankers to reduce their fees to us, which represent the vast majority of what we charge to our customers".
  • Australian Central Credit Union charges a $15 inward cheque dishonour fee.
  • None of the big five banks charges this inward cheque dishonour penalty; St George, which was recently acquired by Westpac, dropped its $10.50 inward cheque dishonour fee in June 2007 following our Fair go on fees campaign. Citibank also dropped this inward cheque dishonour fee.

Penalties don't match cost

The crux of these legal arguments is over banks’ costs.

  • The banking industry says its costs (for example, to process direct debit dishonours or to honour transactions that cause your account to go overdrawn) are commercially sensitive and won’t be released.
  • There’s no publicly available evidence that financial institutions' penalty fees are a genuine estimate of their costs.
  • The total amount of that penalty fee income for the banks is also unclear, because banks’ annual reports don’t separate the income they receive from penalties from other fees (ATM withdrawal fees, account-keeping fees, etc).
  • Previous conservative estimates by the Consumer Action Law Centre and CHOICE suggested banking penalties were worth hundreds of millions of dollars each year. In May 2009 the Reserve Bank of Australia published, for the first time, the value of these penalty fees. It turns out our estimations really were conservative — the big banks charged almost $1 billion in penalty fees in the previous year.

Bankers' Association position

In 2007, we asked the Australian Bankers' Association (ABA) to comment on what critics view as penalties that are excessive, unfair and potentially illegal.

“We recognise that there has been extensive community debate about these fees,” it said. The ABA’s member banks are reviewing their terms and conditions on relevant products.

The ABA's member banks are now providing more information and better disclosure of what it calls ‘exception fees’, making it easier for customers to compare fees between financial institutions. The ABA added that exception fees are avoidable and encourages consumers to check their account balance before making a transaction. See Avoiding penalty fees for our tips.

While better disclosure is welcome, CHOICE’s view is that focusing on it as a solution to the penalty fees problem misses the point. We think the problem is these penalty fees are unfair and too high.

Overseas action over illegal fees

In 2006 the UK Office of Fair Trading (OFT) investigated credit card default charges there and found they’d been set at a “significantly higher level than is legally fair”. It estimated that illegal penalty charges of £300 million (over $700 million) had been charged and told UK card companies that default charges above £12 (around $29) would be presumed unfair. The OFT next investigated bank account charges and published its findings in 2008.

The OFT has the power to make these investigations under the UK’s Unfair Contract Terms laws.

Consumer action groups in the UK say thousands of consumers have been successful in reclaiming penalty fees from banks.

The New Zealand Commerce Commission is also investigating the level of credit card late payment fees there. Under New Zealand law, these fees must be ‘reasonable’.

Fair go on fees button 'Fair go on fees' is a joint campaign by Consumer Action Law Centre and CHOICE to end unfair bank penalty fees.

Here are some tips for avoiding fees:

  • Choose an account that doesn't charge penalty fees. Check the table for the big four banks.
  • Contact your bank and ask for penalties to be reversed. Many consumers have been successful at getting their penalty fees reversed or waived as a result of our campaign. Use our Letters and forms if you need help.
  • Know your account or card. Be familiar with how penalty fees are applied so you’ve better odds of avoiding them.
  • Know your incomings and outgoings. Check that expected payments have been made into your account, and be aware of the timing of direct debits, so that you have enough in your account to cover them.
  • Arrange for automatic payments to your credit card. They can be handy to ensure you at least pay your minimum monthly amount due each month, to avoid late payment fees.
  • Choose an account that charges lower penalties.
  • Open a basic account. If you’re eligible for a concession account, you can lower your general transaction fees, and some banks reduce your penalties too. Check what your financial institution offers. A number of banks have lower penalties for concession accounts.

Fair go on fees button 'Fair go on fees' is a joint campaign by Consumer Action Law Centre and CHOICE to end unfair bank penalty fees.

How credit card penalty fees rose between 2000 and 2008 

 

Credit card penalties 2000–2008
Fees 2000 2001 2002 2003 2004 2005 2006 2007 2008
Late payment fee ($) 20 20 21 23 29 29 31 31 31
Over limit fee ($) 0 6 13 25 28 29 30 30 30
 

Source: Reserve Bank of Australia bulletins up to May 2009, based on average fees for major banks’ credit cards.

More info: check out our Credit cards report and use the interactive calculator to compare interest rates and annual fees.

Fees from the big banks at May 2008

  Transaction account and credit card penalties
Bank (in alphabetical order) Periodic payment dishonour ($) Direct debit dishonour ($) Overdrawn account ($) Cheque dishonour (outward) ($) Deposited cheque dishonour ($) Stop cheque ($)* Credit card late payment ($) Credit card over limit ($)
ANZ 35 35 35 35 0 15 35 35
Commonwealth 35 35 30 (B) 35 0 15 25 25
National Australia (A) 0–30 0–30 0–30 (B) 0–30 0 15 30 25
St George 45 45 38 45 0 8 / 15 (C) 35 30
Westpac 35 35 40 (B) 35 0 12 35 35
 

Source: The banks, May 2008.

* The fee usually depends on circumstances. There’s often no fee if the cheque is lost, stolen or unsigned and you provide the cheque number, for example.
(A) NAB's Clear Banking account has zero penalty fees (conditions apply, see Fair go on fees for details), while other NAB accounts charge $30.
(B) Charged per day, not per item (on the day the bank honours the transaction).
(C) $15 for staff-assisted request; $8 to stop a cheque through phone or internet banking.

When the penalties are charged

  • Periodic payment dishonour: You ask your bank to make regular payments to another account (for example to pay your rent or a bill) but when the payment is processed your account has insufficient funds and the transaction is declined (similar to direct debit dishonours).
  • Overdrawn account: You write a cheque or authorise a payment from your account but the transaction causes your account to be overdrawn.
  • Cheque dishonour (outward): You write a cheque; when it's presented for payment your account doesn't have enough funds for the cheque to clear, so the cheque is dishonoured and you're penalised.
  • Cheque dishonour (inward): You present a cheque to your bank and it's dishonoured by the bank of the person who wrote the cheque.
  • Stop cheque: You write a cheque but then ask your bank to cancel it and stop payment. You may be charged another fee if the cheque is subsequently presented for payment by a third party.
  • Late payment fee: If you don’t pay the minimum amount by the due date. These penalties are sometimes even applied more than once in a statement period. Some credit unions charge $15 every seven days until a late payment is received. Remember, just paying the minimum (for example, 4% of the remaining balance) means you’re charged interest on the other 96% of your debt.
  • Over-limit fee: If you exceed your credit limit, even by a small amount, you can be penalised. It’s a bit like a speeding fine — except when you’re caught speeding, the fine often depends on how far over the speed limit you were travelling — whereas with some credit cards the same penalty can apply whether you’re $1, $1000 or $10,000 over your limit (although some banks such don’t charge unless you’re a certain percentage over your limit).

Basic and concession account penalties at May 2008

  Basic/concession account and credit card penalties
Bank (in alphabetical order) Periodic payment dishonour ($) Direct debit dishonour ($) Overdrawn account ($) Cheque dishonour (outward) ($) Deposited cheque dishonour ($) Stop cheque ($)* Credit card late payment ($) Credit card over limit ($)
ANZ 10 10 10 10 0 15 10 10
Commonwealth 35 35 30 (A) 35 0 15 25 25
National Australia 0 0 0 0 0 15 30 0
St George 8 8 8 8 0 8 / 15 (B) 35 30
Westpac 10 10 10 (A) 10 0 12 15 0
 

 Source: the banks, May 2008.

* The fee usually depends on circumstances. There’s often no fee if the cheque is lost, stolen or unsigned and you provide the cheque number, for example.
(A) Charged per day, not per item.
(B) $15 for staff-assisted request; $8 to stop a cheque through phone or internet banking.

Fair go on fees button'Fair go on fees' is a joint campaign by Consumer Action Law Centre and CHOICE to end unfair bank penalty fees.

Your say - Choice voice

Make a Comment

Members – Sign in on the top right to contribute to comments