Incompetent Bank Regulation Hits Customers Hard

A nasty statistic:

Banks make $38 billion a year from overdraft fees.

Now let's look at the internals on that statistic:

3/4 of all accounts have not had an overdraft in the last 12 months. This means that one quarter of all accounts are responsible for basically all of this.

Of the remaining quarter, half of those account for nearly all (90th percentile plus) of the overdrafts. This means that roughly 12.5% of consumers are bearing the entire brunt of these fees.

70% of the overdrafts happen at a POS terminal or ATM, not by writing a check.

The last statistic is the clear one: There is no reason whatsoever for anyone to take such a hit. The bank knows before they approve the transaction that the money isn't there in the account.

This is not the same thing as a check, which the bank has no way to warn you about before you write it, as there is no "connection" between your checkbook and their computer.

IF we had honest regulators it would be strictly unlawful for a bank to intentionally approve a debit transaction which it knew you did not have the funds to settle unless you had an established overdraft line of credit (at a reasonable APR.)

In fact, it was not all that long ago, in the 1980s and early 1990s, when this was the case: If you went to the ATM and tried to withdraw $100, but didn't HAVE $100, the transaction would be declined.

Every time.

But then the banks came to realize that if they let the transaction go through they could make an unregulated loan for that $100 to you, charging you $30 or more for the privilege - an annualized interest rate of thousands of percent!

This is clearly-predatory behavior. Nobody with half a brain would knowingly sign up for a "service" that would cover a POS or ATM withdrawal at 5,000% interest, yet that is exactly what nearly every bank in the land will currently do by default when you open a new account. They bury the "disclosure" in their terms and conditions, but nowhere do they state these "fees" in equivalent annual percentage rate terms.

It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit them largest-amount-first, because the fee is assessed per item. An example:

$1,000 in your account.

You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee?

THREE - every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, thereby generating three overdraft charges. If they processed the transactions "largest item LAST" you'd generate one overdraft fee - on the $1,000 check.

It gets better.

You have $1,000 in your account.

It is after 2:00 PM, the cut-off for a business day.

You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets.

The next morning a $1,000 check hits your account.

The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!

This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resources to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike.

This sort of practice should be absolutely outlawed, and if we had anything approaching an honest Congress and Federal Reserve it would have been years ago.

Say thanks to Barney Frank, Chris Dodd and of course BenDover Bernanke when you're bent over the table and repeatedly violated by the banksters as a consequence of this "little" scam.

After all, it's only $40 billion dollars.

Comments

[District Ba...:]

I agree with the overall sentiment of your piece, but would add that not ALL banks 'sort' items in their clearing process. My bank, for example, clears checks in the order in which they were written (which can be easily determined by the check numbers). The rationale is that, presumably, I would write the most important checks (mortgage, utilities, etc) first - before moving on to my starbucks or whatever else. I do fully agree that those banks who sort transactions to maximize NSF fees are engaging in a slimy practice that should be stopped.

As for overdraft fees on debit cards - my feeling is that nearly all consumers are aware of this practice. As you noted above, the majority of these fees come from only 1/8 of accounts - indicating that people are repeating this behavior. Whose fault is that? Bank of America (not my bank, and I do not want to defend them), for example, will give you one "free" NSF fee if you go into a branch to ask for it. Thus, the consumer can learn the system at no cost to himself. If he repeats that behavior, he is responsible for the consequences.

Aug 10 12:22 PM

[SAUBW:]

Article is right on, the banks have built and designed systems that maximize revenue through schemes just as these. Make it easy to lose track of balance (using ATM's), allow transactions through for which there are not funds "available" and "hold" large deposits arbitrarily which keeps your funds available lower. They do this with credit and debit cards as well: designed a system to take money from you right away, but try to get money returned on a duplicate or incorrect charge and it will take 7-10 days even on debit cards (and the merchants get the heat cuz customers do not understand the system. No way the banks didn't design that in to deliberately to keep your money as long as possible. I'm sure they have some BS rationale for doing this, but the real reason is that they just can't be moral when there is money involved. Honest bankers are getting harder to find than honest lawyers IMO

Aug 10 12:37 PM

[District Ba...:]

SAUBW -

My suggestions would be as follows:

a) live within your means (don't spend more than you have)

If you satisfy criteria (a), then:

b) keep better track of your finances (know your balance)

If you satisfy (a) and (b), then you are most likely not experiencing these types of fees. However, as a precaution, you may want to:

c) leave a little extra as a cushion in your primary operating account

Now, you probably don't want to be 'forced' to leave a little extra in your account because most transaction accounts pay little/no interest. So your money is elsewhere (brokerage accounts, CDs, MMDAs, etc) earning a better return. Just realize that the consequence of chasing a bit of extra yield is that you may (if you dont keep track of your finances) incur a NSF fee when you spend more than is in your account.

I fully concur that this is an area that should be regulated. However, this is a game where the rules are laid out in advance to the consumer, and the outcomes are predictable - so they should be factored in to one's behavior.

Aug 10 12:56 PM

[seasaw:]

I am very interested in part of your article where they resort the checks to maximize the overdraft fees. Do you know what banks do this? Do you have evidence? Your article implies that it is legal for banks to do this; however, that may not be true.

Aug 10 01:44 PM

[District Ba...:]

Provident Bank (formerly: PBKS) in Baltimore, MD was notorious for this type of activity. I do not know if M&T Bank (who purchased PBKS) employs these tactics or not.

It is legal for banks to do this - at least in the implicit sense. This has been commonplace in the banking sector for years, and the regulators are well aware of it. I've never heard of a bank being sued over such practice - but hey - this IS America...

Aug 10 02:08 PM

[Davewmart:]

I appreciate that is is not your headline.
Just the same, it is not incompetent regulation that is to blame.
The regulators are doing exactly what they intended to achieve, ie. allowing gouging to butter up their buddies who in due course they will join in revolving door appointments.
Successful bank robbers are not incompetent, and neither are robbing banks.
Both are competent sociopaths.

Aug 10 05:51 PM

[levin70:]

Karl

If you don't like it raise some capital and start your own bank and don't do any of these nasty things that other banks do. Nothing is stopping anyone from doing this.

Don't be surprised if no one wants to invest along with you though.

Aug 10 10:48 PM

[H2KOLOB:]

US Bank did this to my College son. he had an old check clear his account which put him in overdraft. he then charges about 10 charges all under $15 ... food etc. when he got his statement he had $360 of fees. US Bank knew each time the Debit card was used that there was no money in the account and that he was being charged fees. they also refused to waive any of these fees.

I agree that this is a good lesson for a college student, but to someone who works his ass of to get an extra $50, I think these slimy theives could have notified him, and stopped approving the transactions after the first one or two overdraft charges.

yes this should be illegal.

Aug 10 11:39 PM

[User 139579:]

And the people it hits most are the ones with low income, who are unemployed or underemployed, such as part-time, minimum wage workers. A person making $8 an hour who works 20 hours a week brings home a biweekly paycheck of $320 before deductions. So, these people may generally have less than $300 in their bank account at all times, and sometimes less than $50 depending on the cycle of their pay period.

That financial condition alone -- having a low balance with no buffer or safety net -- makes it more likely to accidentally overdraft. By failing to notate one transaction, by having a surprise expense, or having one error occur in their account, they will overdraft. Do not forget that many companies such as car insurance companies now require customers to pay by automatic EFT.

If a paycheck is delayed in the mail, even by one day or a few hours, the automatic EFT might hit before the deposit is made and this is not necessarily the individual's fault.

And, the charge that triggers the $30 or $34 overdraft fee may be a $5 or $10 overdraft -- or even less.

So the person is penalized much more in comparison to an individual who brings home a $2,000 or even a $1,000 biweekly paycheck. A $34 overdraft to the individual described in the opening paragraph causes the person and his family to suffer a 10% loss of income for the period. More so if repeated overdrafts occur on the account. That is no slap on the wrist -- that is a sizeable burden and can cause a great amount of suffering.

Also please note that most banks will not notify you that the overdraft occurred, other than sending you an envelope in the mail. So if the person is unaware of the situation, they may rack up repeated overdrafts. I speak from experience.

Aug 11 12:21 AM

[Moon Kil Woong:]

Hmmm, actually the banks are wrong but so is the consumer charging or writing checks on insufficient funds. The banks theoretically do it as a punishment or disincentive. However, there is a point where it just becomes malicious usery. Not like the Congrssional or Senate banking committes care or will ever generate a law against this. Nor any Federal reserve consumer protection arm.

I suppose this is just another reason the Fed wants to keep financial consumer protection in its back pocket. To shut people like Karl out of any reform.

Aug 11 06:54 AM

[lynnybee:]

THE BANK TARGETED MY ELDERLY MOTHER ........... my elderly mother (god rest her soul) did not understand. As she aged we (her daughters) became aware that she was bouncing checks all over town. My mom couldn't afford to lose a penny of her social security check to "fees" . Whoever heard of such practices .........certainly not my 84-year-old mother.

So many of our older citizens just don't understand what is going on, why they do not earn interest anymore on their money, why are there so many fees for everything.

I told my Mom that we have gone back to a time when you called these people ........... BANKSTERS !!

Aug 11 09:18 AM

[pitchingpen...:]

H2KOLOB - I feel your pain. And KD, thanks for calling for reform!

US Bank and the rest of their ilk heavily market college towns and market directly on college campus locations. National Banks with branches in many states appear advantageous to parents in that they can use the same bank for their kids that go away to school and can transfer money to them easily. I really think they count on the kids overdrafting, and their parents paying the freight as a huge profit center in their business plans.

KD and Posters are absolutely correct that to force the banks to not honor debit ATM and Terminal transactions without sufficient funds solves a huge portion of this nefarious banking practice.

I'm going to paste below an edited memo from my son, a 22 year old college student, who noticed overdraft fees appearing on his US Bank college checking account online and KNEW WITH CERTAINTY that he had not overdrawn his acount. The genesis was a mistaken debit and subsequent immediate voided terminal sale from a merchant. The only transaction my son was aware of was the $18.34 debit purchase for which he signed.

The moral of the story really turned out to be: If you won't let US Bank steal your money, they don't want you as a customer. I guess I shouldn't be amazed at anything any more. And btw, kudos to John X for not taking US Bank's bullshit! He even got his last $8.00 back. His narrative follows:

7/7/2009
Approximately 2:00 PM,
-Arrived at The X Bar and Grill. John X spoke with the owner and received a copy of 3 receipts. #1 Invoice 000058, Invoice #1 was the original receipt entered by mistake for a total of $515.00. #2 Invoice 000058, Invoice #2 is the Visa Void Sale, negating the charge of $515.00. This sale was voided within 8 seconds. #3 Invoice 000059, Invoice #3 is the actual debit document entered with John X’s handwriting and Signature for $18.34.

The owner told John X to take the copies of the receipts to the bank and take care of the issue himself. Identifying logical and damning evidence that there was clerical error on the banks part, John X obliged to take care of the issue minus the aid of the owner of the X Bar and Grill.

Approximately 2:30 PM
-I Arrived at US Bank, Any Ville North. I Presented to Megan X the copied receipts. She notified me at this point that the $515.00 was credited back to my account. She then told me $236.50 in fees was still owed to US Bank. These fees were an effect of the -$515.00, charged mistakenly to the account. Prior to the charge from Invoice #1 my account was NOT in the negative column. She refused to remove the overdraft fees even in the event of seeing the 3 invoices. Megan X told me the fees wouldn’t be removed unless she spoke to the owner of The X Bar and Grill regarding the issue. We attempted to telephone the merchant from the bank. There was no response. She told me it was not US Bank’s problem.

Approximately 3:15 PM
-I returned to The X Bar and Grill to speak with the owner of the establishment. He was on the phone with Megan X when I approached him. He wouldn’t tell me what was said between him and Megan X at the bank. But he did tell me he refused to pay the overdraft and negative balance fees. The owner also explained to me that this was not his problem; it was the bank’s problem. I asked him to come to US Bank with me to help me clear up the fees. He refused to aid me in getting the bank to comply. (There was a young man present for our conversation, an employee of The X Bar and Grill) It should be noted that Megan X and The Owner of the Palms both told me they have a personal friendship with one another.

Approximately 3:45 PM
-I returned to US Bank. Megan X asked me what the Owner of the palms said. I replied to Megan X by asking her, “what did PT say to you?” (PT is the nickname of the Owner of The X Bar and Grill) At this point Ms. X attempted to enter an “I asked you first” engagement. At this point, aside from Ms. X’s condescending behavior towards me; she was attempting to play ambiguity games with me. The phrase “I asked you first” is typically a good indication someone is hiding information. From my perspective, Ms. X was enjoying the sport of tormenting me. At this point Ms X threatened to ask me to leave the bank. After further discussion Megan X agreed to remove the fees, pending the approval of her regional manager. After Ms. Johnson discussed the matter with her Regional Manager, he instructed her to remove only the amount of fees to remove John X’s checking account from the negative. At this point in time my account was -$95.73. To my knowledge, the regional manager instructed his subordinate to remove no more that $100.00 in fees from my account. Again, the actual total of fees at this point is $236.50. I objected to the compromise and asked Ms. X for the telephone number of her Regional Manager, his name is Sam. He is based at a US Bank in St. Joseph, MO. The phone call between the regional manager and I took place at 4:01PM and lasted for 18 minutes and 45 seconds. (Per record of my cell phone history) I explained to him that I simply wanted "My Money" that US Bank wrongfully charged me, credited back to my account. Sam explained to me that the damage was done. He in fact used an analogy at this point that swiping a debit card is exactly like cutting someone’s arm with a blade or a knife. He explained to me that the “cut” had already been made, and it was unfixable. After further discussion with Sam, he gave me an ambiguous “theoretical offer” to reimburse the total amount of the fees under the condition US Bank terminate my account immediately. There was much ambiguity in his loaded theoretical offer, so I chose to move the discussion in another direction at this point. After a few more minutes of heated debate and my mentioning an attorney, Sam gave me the offer to reimburse the total $236.50 in the future present tense and I confirmed that he used the word “Will” as opposed to “Might and Maybe.” (Might and maybe were the tenses used in his theoretical offer) The offer was under the condition that US Bank terminates my account immediately. I accepted the offer of full fee reimbursement and the condition that my account be terminated. No figures were discussed with Sam during the entire discussion; he simply agreed to remove all fees due to the situation. I returned to Megan X to complete our agreement. She at this point told me that an additional $8.00 dollar fee was going to be charged to my account that night, but proceeded to tell me “I’ll take care of that though.” Seconds later she returned to the counter and totaled the amount that US Bank was going to offer me. She subtracted the $8.00 from my account anyways, after seconds earlier saying she would “take care if it.” When I confronted Ms. X about contradicting herself, she proceeded to tell me “I’ll take care of it” does not mean she would remove the charge. Seth X was a witness to the discussion Ms. X and I had. At this point when I accused her and US Bank of stealing another $8.00 dollars from me, she threatened to call Public Safety authorities to have me removed from the building. I would like to state that my voice was never raised at any point during my encounter with Ms. X. However, she at this point was yelling at me and had been for several sentences. I felt physically threatened and verbally assaulted. For fear of my physical safety and mental well being, I proceeded to leave the bank. A Check for the total of $132.77 is supposed to be waiting for me at the bank on the morning of July 8th, 2009.

Statement history from 07/07/2009 at 14:28:08 has John X’s account standing at -$95.77. $236.50 was credited to the account making the balance $140.77. Minus the addition $8.00 makes the final amount $132.77.

Aug 11 01:14 PM

[TeresaE:]

Most banks also process all outgoing monies before they credit any incoming.

Resulting in overdrafts even when the money was there.

Those most affected are just so beaten up daily by EVERY THING that they don't go into the bank to complain out of fear the bank will close their accounts. Which truly, would be best wouldn't it?

This is just the tip of the iceberg when it comes to the shady practices of banks. Which, by the way, would be prosecuted if my business treated its customers the same way.

Aug 11 02:10 PM

[TeresaE:]

NSF fees rank right up there with the $48 dollars in interest I have paid, and am still paying, on a credit card balance of $0.47 cents.

Completely regulated, completely legal and as it adds to both the bank's profits and our federal governments tax revenues, will never be fixed.

Aug 11 02:18 PM

[Graham and ...:]

Banks are looking for ways to play GOTCHA just to fatten their wallets. Shame on them.

Aug 11 07:51 PM