David Kirkpatrick

November 6, 2009

Overdraft fees — consumer banks v. consumers

Consumer banking has largely been about screwing the customer for a long time — at least as far as the large, national, impersonal banks (you know, the ones that advertise on television) go. Long ago, something like 15 years ago, I wrote an article for a business magazine on some of the underhanded techniques consumer banks were using to gouge customers.

Back then one of the growing trends was charging a premium for what was called a “meatspace transaction.” Although it sounds vaguely pornographic, a meatspace transaction was anything that involved a living teller, either face-to-face or through drive-up banking. Happily that bit of foolishness didn’t have any legs. One troubling practice that did, and still does, is overdraft fees and how they are processed.

They are almost unavoidable in terms of the bank will happily let you go below your balance instead of declining the transaction.

From the link:

Ever write a check thinking you had plenty in your account to cover it? Make a debit card purchase before your paycheck cleared? How about the time you withdrew $5 too much from the ATM?

Sure, your bank was happy to cover the amount. Why not? Although touted as a customer “convenience,” overdraft fees have been soaring. Last year, overdraft charges generated nearly $24 billion dollars for banks and credit unions. That’s 35% more than just two years earlier, according to the Center for Responsible Lending.

Warning! No Warning

The first problem with overdraft fees is that you don’t receive any notice that the transaction you’re about to make will exceed the balance in your account. If you did, at least you’d be able to choose whether you want to continue with it or not.

In some cases you can trigger overdraft charges even if your online statement shows you have plenty in yourchecking account! That’s because your balance is “theoretical” and doesn’t reflect the fact that a recent deposit may not have been in your account long enough for the funds to “clear.”

But the really dirty part of the process is how your incoming transactions are handled:

The Re-ordering Trick

Another criticism is that financial institutions can play games with your transactions in order to trigger a cascade of overdrafts.

For instance, say you make four debit card purchases in a day. Your available balance was $90. The first three transactions were for $25, $20, and $40. The last one was for $100. If taken in chronological order, there is adequate money in your account to cover the first three purchases. Only the last one would result in an overdraft charge.

But that’s not the way your bank computer system is programmed. Instead, it will change the order of your purchases in order to deplete your account sooner by subtracting the largest transactions first.

In the above example, your $100 purchase would come out of your account ahead of the other three. Since it exceeds your balance by $10, it generates a $35 charge. Next, with your account already under water (according to the bank’s math), your other three purchases are posted. You end up paying $140 (4 x $35) for the “convenience” of overdraft protection.

Quite the trick there. Consumer banks have been playing so dirty for so long, and were on the receiving end of so much government bailout money Congress is stepping up to the plate for the consumer at long last.

We’ll see where this ends up, but I think it’s about time Main Street was given a little protection from practices that should have been illegal from the get-go. I guess we ought to be happy consumer banks didn’t go around breaking kneecaps like Vinny from the corner might have. Because really, that’s about the only difference between usury and a typical consumer bank.

Also from the link:

Kathleen Day, a spokesperson for the Center for Responsible Lending, calls the current state of overdraft fees “ridiculous” and an “outrage.” The Center and other consumer protection organizations place the blame squarely at the feet of the Federal Reserve, which regulates most large financial institutions in this country.

“The Fed has known for years these practices are hurting customers and they’ve failed to act,” charges Day. The Senate Finance Committee has drafted the “Fairness and Accountability in Receiving Overdraft Coverage Act,” or the FAIR Act, which would limit overdraft fees banks can impose.