→ Economy
The Overdraft Scam
| Fri Jul. 10, 2009 10:25 AM PDT
Kathy Chu reports on the overdraft fee scam, which currently generates nearly $40 billion in income for banks — by far their most lucrative source of fees and penalties:
Some consultants offered banks ways to boost overdraft and credit card revenue. A 2001 "checklist" from Profit Technologies — a firm that has worked with 19 of the USA's 20 largest banks — has more than 600 strategies....One strategy listed to boost overdrafts: "Allow consumers to overdraw their ... accounts at the ATM up to the bank's internally set limit." To increase credit card fees, banks can "delay crediting of payments not received in bank provided envelop (sic) or for which payment coupon is not received for up to 5 days," and "remove bar coding from remittance envelopes," slowing the payment.
....Has banks' pursuit of profit gone too far? Ken Vollmer, 49, of Augusta, Ga., thinks so. He sued Wachovia this year, alleging it "purposely structured transactions to make money." A merchant mistakenly put a hold on his funds, then the bank cleared transactions from high to low, triggering hundreds in overdraft fees, he says. Spokeswoman Richele Messick says Wachovia processes transactions in an "appropriate" way and will "vigorously defend" itself in the case.
Banks clear larger payments first, says Talbott, because they tend to be more important. But Douglass Colbert, who advised banks on overdraft and card strategies at Profit Technologies, says fees are a key driver.
"Banks will say (high-to-low clearing) is for the consumer," he says. "Bottom line is, when it was pitched, we'd say ... a side effect is that it results in more fee income to you because it bounces more checks." Colbert says that after leaving Profit Technologies, he joined a credit-counseling firm and saw the damage fees did to consumers.
Just to make this clear: Say you have $100 in your checking account and four checks arrive at your bank in the following amounts: $15, $20, $30, and $150. If you clear them in that order, the first three are fine and only the last one incurs an overdraft. If you clear them in the opposite order, all four incur overdraft fees. Ka-ching! That's why banks like to clear high to low.
In any case, if our Congress had any balls they'd fix this in a trice: simply regulate overdrafts as short-term loans, which is what they are. The interest rates would be high, but nowhere near as high as the effective 1000%+ that banks charge now. And it wouldn't matter what order checks cleared.
Banks still have to make money, of course, and if overdraft fees went down then the cost of other services would go up. But that's fine. There's no reason that overdraft fees from their least prosperous customers should subsidize other business lines. It's better to charge everyone fairly and openly rather than trying to make outsize profits on the banking industry's poorest customers.
And the chances of this happening? About zero. Why? Don't be silly. It's because the finance industry still owns Congress.
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Comments
As always, Kevin is in favor
Submitted by Another Brad (not verified) on Fri Jul. 10, 2009 10:42 AM PDT.
As always, Kevin is in favor of the responsible customers subsidizing the irresponsible, deceitful, and/or dumb customers. If you have a $100 bucks in your account and you write $215 in checks before the first one can even clear, you deserve what ever fees you get smacked with.
Accidents can happen, though, like forgetting to deposit a check, but in those cases overdrafts shouldn't be a recurring event. I see no reason for Congress to get involved.
Your proposed solution is dumb too. We really need more easy, unsecured credit out there? How much should the bank have to float? Should your proposed solution happen, you'll be the first one to start whining about "predatory" banks charging "exorbitant interest rates" for overdrafts.
Why don't we let the banks figure out the best way to run a bank mmm k?
adult supervision required
Submitted by junebug on Fri Jul. 10, 2009 11:25 AM PDT.
"Why don't we let the banks figure out the best way to run a bank mmm k?"
Maybe because the "best way" banks have devised to run themselves played a huge role in nearly driving the global economy off a cliff. And maybe because placing a foot on the throats of their most vulnerable customers -- 1000+% interest rates!!! -- isn't an acceptable business model. Mmm k?
You're kidding me
Submitted by Capital Attitude (not verified) on Fri Jul. 10, 2009 7:33 PM PDT.
This isn't hard.
For example, my wife wrote a physical check for the kids' dance lessons two weeks ago. We expected the check from a local bank to clear within two or three days at most. For some reason, the bank didn't finish processing the check until today. Thankfully, we had enough money to cover it, but if we were on the financial edge, it's not hard to see how a delay like this could cause an honest and careful person to trigger an overdraft while being responsible.
RE: As always, Kevin is in favor
Submitted by John Henry Phelan (not verified) on Sat Jul. 11, 2009 6:18 PM PDT.
"Why don't we let the banks figure out the best way to run a bank mmm k?"
Because we tried that and look where the economy is now. What on God's Good Earth were you thinking?
If banks' reason for
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 10:42 AM PDT.
If banks' reason for high-to-low clearance really was, as they contend, for the consumer's benefit, because "high value transactions are more important", then surely they would have no problem clearing transactions high-to-low, but charging overdraft fees as if transactions were cleared first-to-last. It's not a difficult thing to do.
Right banks?
*crickets*
Well, that's depressing. I
Submitted by rz (not verified) on Fri Jul. 10, 2009 10:50 AM PDT.
Well, that's depressing. I was hoping to see some Friday catblogging!
call me irresponsible
Submitted by thersites on Fri Jul. 10, 2009 10:52 AM PDT.
If I expect to get paid tomorrow, I'll write a check at the pharmacy tonight so my wife won't die. I'll write another check at the supermarket so she can eat. If for some reason my paycheck is delayed a day or two I'll get smacked with the overdraft fee. I'll pay it because I have to.
But don't call me deceitful or dumb.
I've got a better idea:
Submitted by MacGruber on Fri Jul. 10, 2009 11:00 AM PDT.
I've got a better idea: learn to balance your checkbook and you won't have a problem with overdraft fees.
Why do liberals go the extra mile to make solutions so hard? Why does the government have to get involved in everything?
If the paragon of liberal virture - the public school system - spent more time on the fundamentals, like balancing a checkbook, than teaching heteronormative gender bias studies, banks wouldn't be raking in the bucks.
Of all the out of touch things you've ever said...
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 2:20 PM PDT.
Do you really think kids are learning "heteronormative gender bias studies" in the public school system? It's all we can do to teach them to string five sentences together to form a paragraph or add and subtract negative numbers.
I know how much you like to resent colleges and educated people, but let's not pretend that the public school system is anything like our (admittedly liberal) tertiary education system.
I've got a better idea than that
Submitted by Capital Attitude (not verified) on Fri Jul. 10, 2009 7:44 PM PDT.
how about we make it illegal for companies to change the due dates for bills with out having to notify you more than a week in advance. Obviously it's the customer's fault of budgeting when MasterCard changes the due date or the interest rate without warning.
Likewise, it's their fault when their employer doesn't pay on a regular basis or have their pay cut without warning.
We could also make payday loans illegal too which would protect people like our soldiers who have to live on food stamps because we are too busy paying out bonuses for the bankers.
In Kevin's example, if the
Submitted by JS (not verified) on Fri Jul. 10, 2009 11:17 AM PDT.
In Kevin's example, if the bank clears the $150 first it will bounce, but I don't see why the other three checks will bounce or generate overdraft fees. In this specific example, it seems to me that only the $150 check will bounce, regardless of the order of clearing, and only one fee will be generated.
But if your checks were for $15, $20, $30, and $100, then clearing in small-to-large order would generate one overdraft fee (for the $100), but reversing the order would generate three such fees (for the three smaller checks).
No, there is no "bounce".
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 11:46 AM PDT.
No, there is no "bounce". The $150 check is HONORED by the bank. And they charge you for that, because it brings your balance to negative $50.
Each subsequent check is also honored, and an additional fee is charged for each, because they each bring your balance to an increasingly negative number.
Do all banks operate this
Submitted by JS (not verified) on Fri Jul. 10, 2009 11:56 AM PDT.
Do all banks operate this way these days? Last time I had checks bounce (because a transfer from savings to checking did not complete as a result of a bank computer problem), several of my checks bounced.
And Kevin offered his example to specifically to clarify this in the previous paragraph: "a side effect is that it results in more fee income to you because it bounces more checks."
So I wonder if what he was trying to say is what you are saying, but I can see that in some cases the banks allow negative balances.
Yes, pretty much
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 12:11 PM PDT.
As far as I know, every major bank allows you, by default, to overdraft (rather than flat out reject a check or debit card transaction) at the cost of $25-40 per transaction below $0.
Sounds like highway robbery
Submitted by Detlef (not verified) on Fri Jul. 10, 2009 12:45 PM PDT.
Here in Germany you´ll get an overdraft limit by default too once the bank sees that you´ve got a regular income. The limit itself depends on your income and how long you´ve been a customer. It´s normally around 1-3 times your monthly income.
But if you have to overdraft you´ll only have to pay an interest rate on it. Like a short time loan. Although the interest rate itself is higher than for a normal loan. Currently around 10% (overdraft interest rate) I believe.
Fees of $25-40 per transaction below $0 probably would be considered usury by German courts.
We've done a Consumer
Submitted by Steve Aquino on Sat Jul. 11, 2009 5:00 AM PDT.
We've done a Consumer Retorts on this, and a Wachovia customer service rep actually told this that it was done to "get more money out of the customers." But then a corporate higher-up said it was because customers prefer to have bigger checks (apparently for mortgages, car payments, etc.) deducted first.
http://www.motherjones.com/politics/2008/08/consumer-retorts-wachovia
Not sure what the
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 12:03 PM PDT.
Not sure what the misunderstanding here is. Your second paragraph seems to address the question you ask in the first, though you use $100 as the largest debit rather than $150 as Kevin did. If you use $150, then that debit itself causes an overdraft fee, then the $15, $20, and $30 debits do as well.
The confusion may come from
Submitted by JS (not verified) on Fri Jul. 10, 2009 12:22 PM PDT.
The confusion may come from the text Kevin quotes, which mentions checks that "bounce" as well as "overdraft" fees -- which imply overdraft but no bounce.
I assumed that in Kevin's example checks bounced and no negative balances were allowed (since he was trying to clarify the previous paragraph that referred to bouncing). You assumed that the bank honored them and the balance went negative.
If the bank bounces checks instead of allowing negative balances, then in Kevin's case the $150 check would bounce but the smaller ones would not (generating a single penalty fee regardless of the order of clearing). But with the same bank policy, a $100 check clearing first would bring the balance to zero, and the next three (smaller) checks would all bounce (generating three penalty fees) whereas reversing the clearing order would generate only one fee.
I bank at a fairly small,
Submitted by RWB (not verified) on Fri Jul. 10, 2009 11:58 AM PDT.
I bank at a fairly small, local bank. But they play the overdraft game as well. I have never been overdrawn there, but I have to be quite careful. If I go online and look at my balance, they include the overdraft as part of the balance. In other words, if I have $1000 in my checking account, it will appear on the screen that I have $1400 in the account. I have to be certain to drill down and make sure I know how much is actually sitting in the account, which deposits have cleared, and so on. But if I were looking at my balance at an ATM, I'd have no easy way of knowing at that moment how much of that balance is real money--and how much of it is a very high price loan called "overdraft protection" that the bank is trying to sell me. (That said, the best answer is for bank customers to be careful and not cut it close to the bone when your are writing checks.)
Overdraft fees are still
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 11:59 AM PDT.
Overdraft fees are still less than bounced checks fees -- which also disproportionately feel upon their least prosperous account holders. (I'm speaking from experience here.)
The real problem isn't writing checks at the pharmacy or the grocery store (because, you know, we all want to not die and eat....) but we now live in a debit check card and electronic payment society where keeping track of every purchase in relation to a balance requires a much stronger sense of discipline and record keeping than a check book once did. Economists will tell you that paying for something "easy" (and I mean kinetically easier -- swiping a card or pushing a button) almost always results in spending more than going through a wallet for cash or writing out a check.
Is paying highest to lowest (and thus raking in every fee possible) annoying and possibly unfair? Yes. It is. But I'm really not sure this is worth regulating. Not when there are so many other blatantly exploitative issues out there regarding personal finance.
I think that many problems
Submitted by cc (not verified) on Fri Jul. 10, 2009 12:06 PM PDT.
I think that many problems are caused by the "holds" (mistaken or otherwise) that are placed on peoples accounts. You are usually never told what the amount of the "hold" is. I believe that merchants should be required to give you a receipt for or notice of the amount of the "hold". Obviously, this could generate some heated discussions at gas stations (which routinely place $50 or $75 "holds" following gas purchases) when a customer has only purchased $20 or $30 worth of gasoline!
Overdrafts
Submitted by Anonymous (not verified) on Fri Jul. 10, 2009 5:00 PM PDT.
First, Kevin's math is a little off. If the overdraft is covered the next day, and the fees are typical ($35 each) then the true interest rate for the one day approaches 25,000 percent.
Second, it's clear that the banks are NOT trying to accomodate customers, they are trying to milk customers. Let me give a clear example of how the biggest banks do this.
I have an automatic, bill payment in the amount of $100 that is due to be paid on Monday. But the bank does not deduct that amount first thing in the morning. Say I only have 90 in the account. I check my balance at an ATM, and it tells me I have $90. Through the day, I make 5 debit purchases that total $80. Each one is paid. At the end of the day, the bank pays the 90 first, then charges $35 each for the 5 transactions that I made AFTER checking to make sure the money was available.
The solution is simple. I should be able to instruct the bank NOT to allow an overdraft on my account. But the bank will not honor such a request. It insists on "loaning" me these small amounts as a "convenience" to me so that it can charge me $35 to advance 5 or 10 dollars to me when I use my debit card. If the bank were REALLY trying to accomadate me, it would allow me to opt out of it's forced loan program.
I am not getting your logic here
Submitted by Mike Haubrich (not verified) on Sat Jul. 11, 2009 6:19 PM PDT.
If I follow you, you are saying that even though you know that you have a deduction scheduled to be paid, you charge the money on your check card anyway and then blame the bank for allowing you to do so?
If you know that the money is going to be taken out, don't spend money you won't have. The money wasn't available.
banks will try every trick
Submitted by steve s (not verified) on Fri Jul. 10, 2009 5:30 PM PDT.
banks will try every trick in the book to steal your money. As the existence of Profit Technologies implies, they will even pay outsiders to think up new tricks they can't come up with. Read about the 400 year history of banks, and you'll see that whenever they haven't been heavily regulated, they've been little more than well-dressed thieves.
Even Adam Smith decried usury
Submitted by Trippp on Sat Jul. 11, 2009 9:01 AM PDT.
Ah, the ignorant MacGruber asks "Why not allow usury? It only hurts the stupid and poor and ignorant."
The sainted Adam Smith himself stated that usury should be prohibited because it harms the overall economy, misdirecting money that would otherwise flow to the place where it would be used best.
Think it through. If your premise is that a totally free market automatically finds the best use of the money then a misdirection of that money through usury or fraud or theft makes the market less efficient.
And my brother-in-law owns a couple small town banks and even he admits that overdraft 'fees' are simply a way to get around the usury laws. Loan a customer a buck and you can charge a certain interest rate, maybe 20% or something like that. But loan a customer a buck to cover a check that would have bounced and you can add a $40 'fee' that essentially charges 4000% interest and you get your buck back, too.
This is nothing new. It has been known in banking circles for decades - probably for centuries.
Tripp
Using cash for everyday
Submitted by Anonymous (not verified) on Sat Jul. 11, 2009 9:49 AM PDT.
Using cash for everyday purchases is a very good financial management plan. And one must balance their checkbook.
However, none of that means that this usury should be allowed.
Bank overdraft scams
Submitted by Anonymous (not verified) on Sun Jul. 12, 2009 11:23 AM PDT.
Banks often delay credits to accounts from deposits, which can result in overdrafts. Banks always seem to time withdrawals and deposits in ways which benefit them the most. Check book balancing can be difficult because it's hard to know exactly what has cleared. Notice Kevin's article mentions suggested ways to delay deposits. The best thing to do is to frequently monitor checking accounts online when unsure of one's balance. For someone, for example, an elderly person, who is unused to computer technology, this could be difficult.
That sort of deliberate
Submitted by Neil B ☼ (not verified) on Sun Jul. 12, 2009 4:09 PM PDT.
That sort of deliberate attempt to impede payment acceptance, resulting in fees is fraud and a form of theft. It should be treated literally as such. Note, if an employee steals a little thing from an office or a customer; from a store it is "theft" and treated severely (or, it can be.)
Enough is Enough
Submitted by Anonymous (not verified) on Mon Jul. 13, 2009 7:57 AM PDT.
Banks have used technology to make it very easy for consumers to track their accounts and make smart decisions about their own spending. They have online statements 24 hours a day with mobile options on your phone for many. You can also call anytime and go to the ATM to get your current balance. They also offer a line of credit to just about anyone that would help you avoid all of this but no one ever signs up for it leaving you vulnerable to overdraft fees.
The problem is we have people with $150 to their name and they expect the bank to take all the risk of covering their short term financial needs without any risk to them. Do you expect the grocery store or dry cleaners to just let you do business with them if you can't afford it or you forgot to make a deposit...NO..they would all go out of business and banks are no different
These people are lucky their not eating lunch with their family and then getting the charge on their debit denied instead of the bank paying for it and saving them the embarrassment. I don't think they let people wash dishes anymore.
Here's my solution. If you can't keep your balance above $200 you have no need for a bank account. No bank account means NO FEES!! Do yourself a favor and don't spend what you don't have!!
solutin
Submitted by Anonymous (not verified) on Thu Jul. 23, 2009 5:40 PM PDT.
probity financiial services providds a bank account that never charges overdraft fees even if you overdraw your account. Simple solution for consumers and requires no government agencyQ
That each overdraft on an
Submitted by Anonymous (not verified) on Mon Sep. 21, 2009 8:51 AM PDT.
That each overdraft on an account is regarded as a black-mark towards credit un-worthiness, which in turn effects personal financial mobility, seems utterly reckless also.
Large concentration of power. No accountability. No counter representation. You couldn't script it better. Who allows both their need and their ability to rest in one institution?
Hermes watches
Submitted by Hermes watches (not verified) on Wed Dec. 2, 2009 6:53 AM PST.
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