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[Warning: this post starts off with a long and self-indulgent complaint about my bank. Feel free to scroll down to the bit where I actually get to the point.]

On March 11 of this year, I borrowed $200 from Citibank (NYSE:C). Four days later, on March 15, Thomson Reuters was kind enough to directly deposit a substantial paycheck into my account — one which was much, much larger than $200. And ever since then, I’ve been steadily paying back Citibank the money they so kindly lent me, at an interest rate of 13.25%. On April 25, I paid $11.52. On May 23, I paid $12.15. And on June 26, I paid $12.23. At this rate, I am informed on page 5 of my most recent statement, I will pay off the balance in about 18 months.

Citibank, I hasten to add, is doing me a favor here: the standard interest rate on this kind of loan is significantly higher than what I’m paying, at 18.25%. Still, my behavior doesn’t make a huge amount of sense. I have many thousands of dollars in the bank, earning an interest rate of basically zero. In fact, I had many thousands of dollars in the bank on March 11, when I borrowed that two hundred bucks. So, what was I thinking? Why did I borrow the money in the first place, and why have I been so miserly in terms of paying it back? Do I want to maximize the amount of money that Citibank extracts from me in interest payments? It certainly seems that way.

The truth, of course, is more mundane: I had no idea that I borrowed $200 on March 11, and Citibank certainly never saw fit to inform me of the fact directly. Instead, they buried the details of the loan on page 5 of my (unopened) bank statement. Meanwhile, they quietly and automatically deducted those small minimum payments out of my checking account — payments which were small enough that I failed to notice them until this morning.

As for the $200 loan, well, it turns out that March 11 was a very busy day for my checking account. I deposited a small check for $17.75, I made two different ATM withdrawals, I automatically transferred $1,000 to an investment account, I paid my Amex bill, I made another automatic payment which goes out every week — and, on top of all that, a $250 check which I wrote on February 12 was finally cashed that day as well. All of which was enough to push me $112.56 into the red. Citibank then immediately took the opportunity to round that number up to the nearest $100 — because hey, why lend me $112.56 when you can lend me $200 instead — and automatically deposited that sum into my account, leaving me with an account balance, at the end of the day, of $87.44.

This is a yuppie overdraft: rather than charge me $35 a pop for overdrawing my account, Citibank just rounds any negative balance up to the nearest $100, and transfers that sum over from something wonderfully called a “Checking Plus” account. Which is what they call an overdraft line of credit. Naturally, when my paycheck arrived four days later, it went into my checking account, which is separate from my Checking Plus account . As a result, ever since then, I’ve had a steadily positive balance in my checking account which has been larger than the amount I owe on its overdraft facility. And ever since then, Citi has been quietly paying off the loan at a rate of $12 or so a month, in the hope that I would never notice it. After all, any sentient being, upon seeing this situation, would of course pay the entire loan off immediately.

When I discovered what had been going on, my first reaction was of course to just pay the loan off in full. But my second reaction was that I wanted to ensure that I didn’t end up in this situation again. So I phoned up Citibank. “I see that you’re automatically deducting the minimum payment from my checking account every month,” I said; “do you think I could switch that to the maximum payment, instead?” If I ever have a balance on my Checking Plus account, I would very much like that balance to be paid off in full.

You know the answer, of course: no, Citi couldn’t possibly do that. Automatic payments can only be for the minimum amount due, not for the full balance.

So I tried another tack. If Citi couldn’t pay off the overdraft automatically, could it at least inform me that the overdraft existed? After all, Citibank has this wonderful thing called the Citi Alerting Service, whereby you will get a text message, or an email, or both, when certain types of activity take place on your account. You can get your credit card balance emailed to you every day! You can get a text message every time a check is presented for payment on your account! You can even be alerted to any new deposits!

So, I asked, could Citi alert me when there was activity on my Checking Plus account? Or maybe, could I use the Low Balance Alert to let me know when the balance on my checking account went below zero? Again, sadly, the answer was no. While the balance on my account did briefly dip below zero intraday, it was nice and positive — to the tune of $87.44 — by the end of the day, so the Low Balance Alert, which looks only at the end-of-day balance, would never have been triggered. And naturally, while it’s possible to get activity alerts for my checking account and for my credit card account, it’s weirdly impossible to get any kind of activity alert whatsoever for the overdraft loan facility.

By this point, it was abundantly clear what was going on: Citi was doing everything in its power to try to keep me in the dark as to the amount that I had unwittingly borrowed, and to try to ensure that I remained in debt to them for as long as possible. The story doesn’t end there, but I won’t bore you with the gory details, I’ve gone on way too long already. Suffice to say that once I started looking in detail at my statements, I saw that I didn’t need Checking Plus at all: I already have automatic overdraft protection from my savings account. (If I get overdrawn on my checking account, then the savings account will cover the negative balance.) Citibank simply inserted the Checking Plus product as the first recourse, presumably as part of the “exceptional service, special benefits and preferred access” I’m granted as a Citigold customer.

[tl;dr readers start here; everything so far can basically be summed up with the word "overdraft".]

The real story of what’s going on here, of course, is that Citi’s adversarial ways are a direct consequence of the “free checking” meme. Every bank wants to be able to offer free checking, and so as a result, every bank needs to find hidden, annoying ways to make money from its checking accounts instead. This is just one of many such ways. But it’s particularly galling to me, because I grew up in the UK, where overdrafts are much, much simpler: they’re just negative balances. The minute that sufficient money is deposited into the account, the overdraft gets paid off in full.

For the past 15 years or so, as long as I’ve lived in this country, I’ve had a “why can’t the USA be more like the UK” attitude towards checking accounts. In the UK, this kind of overdraft shenanigans doesn’t happen, ATM withdrawals are all free, etc etc.

And then I read John Lanchester’s masterful essay on the PPI scandal in the UK. Make sure you read it, even if you’re not particularly interested in British banking: it’s one of the best things ever written about bank malfeasance. But in a nutshell, all the UK banks made billions of dollars, over the years, selling something called payment protection insurance — a suite of products which were sold to bank customers, as Lanchester puts it, “in the knowledge that they were not and would never be of any use”.

In the wake of an important lawsuit, the banks have now been found liable for the the money they extracted from UK consumers over the years; the total amount they’re going to need to pay could well exceed $30 billion. That’s about $500 per UK inhabitant — the equivalent of a $150 billion settlement in the US.

No wonder the UK banks didn’t need to nickel-and-dime their customers on things like ATM fees and overdrafts — or, to put it another way, no wonder they didn’t feel the need to twist their regulators’ arms to allow them to do so. They were making so much money on PPI, they didn’t need to.

All of which is to say that retail banking is broken, it’s broken everywhere, it’s endemically reliant on hidden fees, and that if you think your bank is being transparent about how it’s making money from you, or if you think that your banking is free, then you’re almost certainly mistaken.

The solution to this problem is a combination of legislation and regulation — something which is more likely to happen in the UK than it is in the US. Necessarily, as those laws and regulations take hold, banks will be forced to move to a transparent system of monthly fees or the like. No one likes those things. But the next time you find yourself getting angry about fees which are out in the open, just remember that they’re probably preferable to the hidden fees they’re replacing.

Source: Adventures With 'Free' Checking, Transatlantic Edition