Kevin Drum dares someone to defend the booming business in overdraft fees. Basically, a lot of people running their finances close to the line use their debit cards for small purchases, and find that each one has triggered an overdraft fee of $35. I wouldn't discourage a law making opt-out, rather than opt-in, overdraft mandatory. But what's to stop the bank from selling it to you at time of purchase? It probably sounds great if you're the kind of young or financially uneducated person who racks up a lot of overdraft fees. I have an overdraft because someone asked me during a routine call to Citibank, and I thought, sure, why not.
Meanwhile, we'll probably get annual fees on our checking accounts anyway. The banks need to repay TARP and get out from under the eye of their legislators, and the banking business is only getting more competitive as customers can shop tiny differences in interest rates. Bounced check fees are drying up, because people no longer write many checks.
In theory, you could switch banks if they imposed a small monthly fee. But are you really going to, for a couple of dollars a month in fees? Especially if all the other banks are having the same problem?
But no attempt to save people from their overdrafts will work if we don't get to work educating people to know that they need a buffer of savings between themselves and the bottom of their bank account--and to watch their bank balance to make sure they're not going to incur overdraft charges. Yet most people don't; I've incurred an overdraft more than once through stupidly failing to transfer money from savings to checking. And I'm not sure I even noticed what the fee was.
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I don't have a problem with overdraft fees as long as they're spelled out up front. Other than that, doesn't this fall into the category of a private business arrangement the government doesn't have an interest in?
>I've incurred an overdraft more than once through stupidly failing to transfer money from savings to checking.
Try moneycenter.yodlee.com
I dare to defend overdraft fees. You can never protect people from their own stupidity, they only learn from it (hopefully). So if someone suffers because they are charged too much for it, then hopefully they are at least smart enough to learn the lesson the manage their finances better so that they do not overdraft.
To protect people from overdraft fees is like being an overprotective parent. Once that child leaves the home, that child will never know how to survive in the real world. This is the real world. You learn lessons.
Further there is an ugly sense of entitlement. The bank is doing you a favor by letting that check clear.
Tough luck. deal with it.
My favorite is how US Bank (and probably all banks) make sure to go in order of largest transaction to smallest transaction, not the order the transactions happened, so as to generate the largest number of fees.
Over by $10 because you had to spend $60 to see the doctor (when you had $50 available), but yesterday you spent $2 for a coke at McDonald's, $2 for bread at the grocery store, and $6 for a couple gallons of gas with your debit card? Say hello to $105 in fees on those transactions instead of the single, later $60 one.
Yup, I had that same problem a couple years ago.
Maybe your bank does, but more likely they are just going in terms of how they received the transactions. I noticed before I switched from debit cards to credit for small transactions that while some stores, like Walmart, immediately submit the transaction to the bank electronically, my local grocery store submits the next day, and a local surplus store doesn't submit for several days.
A lot of banks seem to try and maximize fees. Thats why I use debit cards.
The worst thing I saw what some banks BofA for example won't let you turn the service off. However, if that's the case people should switch banks.
I do have a question. I go to a small community bank that has great service, reasonable rates and is fair about overdrafts and such. When there are so many banks like that out there, why do people go with BofA? They seem to do nothing but nickle and dime customers to death.
Seriously. I've been wondering that for years.
I haven't paid an ATM or overdraft fee since 1994 or so. I had a college roommate who had BoA and he would pay $1 to withdraw $5. Could not understand it.
I think it's the number of ATMs. There's always a BofA ATM around so you never get dinged with that out-of-network fee. That's why I'm at BofA, anyhow. And you can avoid all the fees if you keep a few hundred bucks in your account.
Convenience. If you live in a small area, it's easy to have a small bank. But I bank at Citibank and Navy Federal Credit Union, and while I love NFCU, I have a hell of a time finding space in my day to drive to Arlington to deposit checks. Also, if you travel a lot, it's valuable to have your bank wherever you go.
Meghan,
I'm not sure as to the particulars of the NFCU mail room, but you might be surprised how fast the checks are deposited if you just mail them in.
Mail them in? What year is this? The shiny new BofA ATMs don't even require a deposit slip or envelope anymore. You just put the check in, the magic elf inside reads the check, asks you to verify the amount, and off it goes.
I would choose BofA over a community bank in a heartbeat, for that reason alone. Yes, they charge big fees for various things, but somehow I've never found myself doing those things. I withdraw cash, I deposit checks (both through the ATM), and I use their web interface to pay bills. That's it. My only criteria are the ease with which I can do those things. BofA has ATMs pretty much everywhere (for some definition of everywhere), and thus everything Just Works.
Two answers - the first is the one offered by Megan - the value of ubiquity.
The second answer as to why people choose BofA over community banks is - they don't.
That is, if you look at organic (as opposed to merger/acquisition-driven) changes in deposit market share over time, there is a steady seepage of market share away from the behemoths and to community banks. Which is a key reason why bank start-ups have been at historical highs in recent (pre-crisis) years despite the conventional wisdom that giant banks' scale gives them insurmountable competitive advantages.
I think there are loss leader and cross subsidy issues at work. For example I have c $1500 in a 'free' checking account, I write a few checks a month, have some direct deposits posted, get a statement in the mail, and use the ATM card at my bank say once a week. All of this the bank provides at some cost to it which is non zero. The only benefit of the bank is that it avoids raising $1500 in the wholesale market. Libor is around 30 bp so the benefit to the bank is $4.50/year which doesn't even cover postage on the statements. But if they get 100 people like me there is some non-zero number that will pay the OD fees to subsidize the rest. I'm sure the banks know that of these 100 people 5 will have 3 OD's a month, 10 will have 2 and 15 will have one and that makes up for the people like me. So that is 50 OD's in this group at say $35/pop is $1750/month or $17.5/month for each of the 100 accounts and is proably at a level that covers the costs. Now my numbers are purely illustrative but representative of what I think is the thinking.
Now if we said no more overdraft fees (but charged interest at say credit card rates) then there would be lower fees to some but modestly higher fees for most.
I think you have an informational asymetry because teh bank has better knowledge on likely OD's than individuals. that is, most individuals will think this fee will never hit them but it actually does from time to time.
So I don't think it is so much that OD fees as such are egregrious it is lack of transparency in pricing.
I have a hard time believing that a bank has a better idea of when i will overdraft than I do.
Well, that's true and it's not. The bank knows the statistical probability that any given customer will overdraft.
Agreed with this: it's an effective loss leader.
On the one hand, it sucks a lot of money from people who aren't able to manage a checking account that you can take money from in a bazillion different ways (paper checks, echecks, account-to-account transfers, direct debit, check card, debit card, ATM, billpay, etc), each with their own little rules, quirks, and posting timeslines. On the other hand, it also helps secure more sophisticated higher-end customers who may purchase other, more profitable products, but whose risk of overdraft is minimal.
a $25 overdraft fee isn't bad, its when they add up that it becomes a major problem. When i was younger, I paid over $100 to cover overdrafts totaling less than $20 a number of times. The bank offered to let me overdraft my checking account from my savings, but only did so in $100 increments, and at the time that did not work out too well either.
That said, in texas one can actually see jail time for those sort of "fraudulent" transactions, so even an expensive overdraft bill is a worthwhile protection.
I don't so much have a problem with overdraft fees as I do with the sketchy practices banks employ to generate them.
I hate them. I am the kind of person who never knows how much is in the bank, unless I just checked. So I want my debit card to take care of my budgeting: I have asked my bank to have my debit card be just that, a debit card. Not a credit card. No pending charges, no overdraft - if there's no money in the account, I want the purchase refused! Nope, said the bank, there's no way for us to do that. Upsetting.
Me and my wife are finally in a better financial position than we used to be. We have more responsibilities and still don't have a huge cushion - but keeping track of small ATM purchases are no longer where our financial stresses come from. I just looked at a 529 college savings account calculator and had a heart attack figuring out how much is necessary to cover our children's education even with 17 years of interest.
Anyway, I feel like we paid our dues and plenty of stupidity tax and if it turns out OD fees subsidize those who don't incur them I want my time where I can get some benefit from other people's struggles with responsibility. I certainly paid avoidable fees enough when I was young, poor and not paying attention. Part of why I now pay attention and live responsibly is because of all the aggravation I incurred in my 20s. Being a responsible, tax-paying working stiff needs all the rewards we can give to folks for living that way. Otherwise why grow up?
that's exactly why OD fees are good. to learn to take responsibility
"Stupidity Tax" LOL that is a great way to describe this fee. Agree totally
My wife and I drive 90%+ of our monthly spending through credit cards. We are both rewarded handsomely for all purchases, and neither credit card charges a dime of interest if full payment is made on time, which we do each month online.
If we weren't old fashioned sticklers for putting something in the collection basket each week at church, we might never write a check.
The interesting thing to me is that payday lenders are routinely vilified while bankers are often regarded as pillars of the community, despite the fact that standard bank overdraft practices are far less consumer-friendly than payday loans. The debate over payday lending is relevant because bank overdraft charges effectively form the umbrella under which payday lenders can function. Far more than banks care to admit, overdrafts and payday loans are substitute products. In fact, the biggest difference is that payday lenders offer consumers a better deal than banks do. The typical payday loan costs a fee equal to 15% of the amount borrowed for a two-week loan, which equates to an APR of 391%. Borrowers must actively seek out payday loans, and the terms and conditions are all laid out immediately prior to the transaction. In contrast, the effective APR on a typical overdraft transaction can exceed 1000% (it varies by type of transaction – check/ATM/debit) and disclosure, while excellent at some institutions, is broadly far inferior to that of the payday loan industry.
I disagree with my Representative, Carolyn Maloney, on A LOT, but I think her overdraft bill strikes a very good balance between protecting vulnerable and often unsophisticated customers without unduly interfering with the free market.
http://www.pecuniarius.com/blog/?p=173
Payday lending if used responsibly could be a good solution to short term cash flow issues for people with bad credit and no other resources - but it seems likely that many of those people are apt to use payday lenders to dig themselves further holes.
I would expect the majority of OD fee payers have better credit and more financial resources than those who use payday lenders regularly. It seems unlikely to me that most people paying an OD fee need the services of a payday lender to mitigate their economic problems so much as they need better organization. For a lot of them the same effort needed to go to a payday lender and deposit the funds to cover their checks could be used to balance their checkbook, borrow from a friend, put charges onto credit cards instead of debit cards, and or do their home budgeting more carefully. I have no data but believe OD charges are more about attention to detail rather than a pure lack of cash.
I agree on payday lenders - they do provide a valuable, once-in-a-blue-moon service for most of their customers. But as you allude to, the minority of customers that get stuck on the fee treadmill provide an outsized share of the payday lenders' profits. In payday lenders' defense, their profit ratios aren't outlandish, so when you take into account the cost of origination and high rate of default, they aren't actually overcharging their customers.
On overdrafts, though, some really striking data - by far the most thorough study ever done on the topic - came from the FDIC last year - link here:
http://www.fdic.gov/bank/analytical/overdraft/
A disproportionate share of overdraft income comes from low-income customers who live hand to mouth, so while that doesn't absolve them of the responsibility of managing their finances, if you check out the data in the FDIC report I think it suggests that lack of cash (as opposed to pure carelessness) is actually a pretty strong driver of overdraft fees.
My favorite scenario:
I go to the gas station pump and use my card as a debit. It "holds" $75 for me to use to fill my tank. When I'm done and I drive away, it doesn't debit the account the $40 I actually used and release the $35 I didn't, it will debit the $40 and continue to hold the $35 without any indication that it did so.
Nothing on my online statement says that "Joe's Quick Stop is holding $35 of your money." In addition, sometimes the hold can last only 24 hours, and other times, it will drag on for 72 or so.
I got bitten twice by this little bastard.
The first time, the bank went back and erased the fees, the second time, they wouldn't. In the end, I fixed the problem myself...I no longer pay at the pump. I use a "start" card to get the gas flowing and when I'm done I pay inside which, for some reason, shows up immediately in my online ledger...
Here is another case of the "market model" justifying specious practices. According to the model the individual consumer must learn more about financial matters and take more personal responsibility, thus utilizing their "freedom" to make better personal choices. Who could argue against that?
The reality is that the banks already make $27 billion per year on overdrafts and thus have a huge incentive not to clarify such matters as when checks will clear, a huge negative incentive also to keep regulators from doing anything to fix the problem. (Problem? What problem?) As in the used car business, there is a banking industry ethos bent on keeping the customers from understanding anything. I remember the vague, qualified answers banks used to give to people who wanted to know if newly offered "money fund" accounts had FDIC protection. On and on goes the explanation, but never a simple "yes" or "no."
Individual responsibility, fine. But the larger problem is that people who make an honest living simply don't have time to pour over pages of fine print issued by corporations with teams of lawyers, experts, and supercomputers determined to extract another $10 out of 20 million pockets. The increasing financialization of basic social needs and services spreads layers of obscurity that works to the banks' advantage, as this $27 billion in "oversights" shows. The item it now takes everyone to deal with financial issues and minor service contracts is one of those enormous drags on efficiency market apologists love to measure in government services (the old "lines at the post office" dogma).
Imagine telling people it is their "personal responsibility" to check the wiring in an elevator or the engineering diagrams for a bridge before using. Why do we accept the idea that our "financial engineers" (as they like to call themselves) should be free to set the risk levels for all of us? Why do we accept that their "financial bridges" will collapse every few years and we will all take the plunge? It is not as if people are really just "free" to opt out of the financial system, as the market model implies.
With the enormous expansion of finance in global interactions should come much greater oversight. We should treat finance more like architecture or engineering--a licensed or otherwise regulated profession with public duties and personal (not corporate) liabilities. Whether on the consumer level of banking or in global finance, the sole duty to shareholder value creates yet more perverse market incentives. It is time bankers were forced (not asked) to structure their profession in the manner of grownup, licensed professionals with some sense of civic duty and personal liability apart from profit motive.
What kind of world would it be if you couldn't exploit the lazy, ignorant and foolish?
Socialist?
Is knowing how much in your account really that hard? If it is, you deserved to be charged so much you are bankrupt, and then maybe you will learn your lesson to manage your finances better.
Let's say, three bank accounts, one credit card, three utilities companies, and one phone company. I agree, that' not so hard.
But the effect is growing and snowballing rapidly as the financial sector grows to nearly 40 percent of national profits. Just the other day I caught my gym NYSC adding "extra charges" on the credit card. They had sent me one notice amid their forty junk mailers, then started charging the extra $30 per month. Such lists can go on and on. Most people don't want "freedom" defined as more and choices, more and more offers, more and more "courtesy" calls.
I agree totally with the problems you describe and the need for more honest descriptions, fraud reduction by major businesses, etc. (I encountered similar problems trying to refi from bank of America. They told me so much that was factually wrong (they said PMI for a loan from another lender wouldn't be tax deductible. That, yes, they had checked with the IRS on this. That BOA was a large company and therefore trustworthy. It turned out the competing loan was, in fact, covered by the tax deduction window and the BOA loan officer was lying through his teeth. ) and BOA refused, as a matter of policy, to put anything in writing till I gave them a credit card and paid them. Their logic was that I could cancel the charge. No thanks. I called three times and got the runaround regarding getting something in writing till one guy informed me it was a matter of policy. He insisted I wouldn't find a lower rate, but couldn't have anything in writing because I "might shop around." huh?
Some of the best, most effective regulations are those which simply give people a better idea of what they're buying. (Yes, I do read and love ingredient labels.)
(Similar examples involve mandated public records for pollution. Without any other regulation, the simple availability to public scrutiny of who was dumping what into the river served to lessen the problem.)
Good example. Personally, I do not enjoy finance, do not find it thrilling, and do not want to be forced to study it to find out who is running the country and how.
nf, and others, we're not talking about overdraft protection on checks - you should know better. But there have been times in my life I've lived on the edge, moneywise, and have known that I wasn't dedicated enough to account every penny. I stayed out of overdraft trouble by not writing any checks. Getting my debit card declined happened a few times, and it was no big deal - just run it on credit, knowing that I had a couple of extra paydays coming soon. The problem with debit-card overdrafts is that they happen without any notification that you've triggered one.
checks, debit cards, the same. the point is that you should be more responsible in managing finances so that you do not occur these fees. if you do, well, hopefully you learn to be more responsible.
"The problem with debit-card overdrafts is that they happen without any notification that you've triggered one."
the underlying problem to that problem is that you do not know how much money is in your account. you should. if you solve that, then there will be no problem.
I mean honestly, how is it even possible people can be walking around spending money, apparently having no earthly idea how much money they have? And yet spending it anyway!
I mean what are they going to do, not buy groceries later that day?
It defies belief!
I'm sure they have some idea of how much money they have. They just may not know to the exact cent how much they have, and may not be getting straight answers from their bank about it either.
Is it really asking too much for people to not bounce check and maintain a minimum balance - of at least ZERO?
A minimum balance of zero is about as reasonable as I can possibly imagine, and I don't see a problem with charging people a fee if they can't maintain it.
I mean what is next, people complaining about penalties on CDs for early withdrawal?
The sense of entitlement, unreal, it is. Mmrrrmm!
Is it really asking too much for people to not bounce check and maintain a minimum balance - of at least ZERO?
All people are saying here is that overdraft protection shouldn't immediately be on for debit cards. At the minimum it should be reasonably easy to shut it off. That way if you go to pay for something that costs $25 and there's $20 in the account you just can't buy it.
Again you are missing the point. If people know how much is in the freaking bank, the freaking OD fees don't even matter!
Is it really that hard to understand??!!?!?!?
I appreciate the desire of some for a simple world where the money is there or it isn't. But that ship sailed long ago. Today, the banks lend money they don't have to people who may or may not pay it back and, if things go sour, the government magically creates more money to prop them up. Likewise, if the economy is slow, the government mails out checks or reduces withholding to make people feel like they've got more to spend even though the value generated by the economy isn't actually increasing. We live, furthermore, in an era where the credit card has taught people that it's not how much cash you have, but how much cash you can access, that matters, and that you figure out your finances when the monthly statement comes, not on a day to day basis. The debit card throws this system for a loop for people with lean finances because it looks and feels like a credit card, even though it's a check. Part of that means that a lot of people swipe the card and keep moving, rather than tying up the line while they update their check register like they would with a check. You may think that's wrong, but it flows naturally from the illusion of convenience that was used to sell people on debit cards.
So, is it too much to ask people to know how much money they really have? A fair percentage of them: yes. Back in the old days, only rich people had access to financial instruments. Everyone else just had cash. The banking system has made - and lost - a ton of money by democratizing money to the point where any idiot can have a credit card, debit card, stock, mutual funds, mortgages, etc.
In a couple months, the government is literally going to be unable to spend another dime unless the Senate votes to raise the debt ceiling, and so the Senate will. At the same time, government leaders are organizing the auto industry, continuing to decide what to do about the banks and trying to figure out how to spend more of an allocated stimulus package designed to inject money into the economy that exists not because someone made something to earn it but because the government said it exists now. And you expect people to believe that they can't spend it unless it's in their account and it's up to them to know what they actually can spend? It's a nice idea for a certain set of people that feels impressed with itself for maintaining old values like financial responsibility, but that and fifty cents...
"That way if you go to pay for something that costs $25 and there's $20 in the account you just can't buy it."
And just maybe if you know that you only had $20 in the bank, you then wouldn't spend that $25!!!!!!
I already outlined a case above where it so happens you would not know how much money you had because someone has an invisible "hold" on a portion that doesn't actually belong to them. It's also not reflected anywhere in your online ledger.
So how are you to know that "Joe's Quick Stop" is holding $30 of your money even though you didn't spend it? You don't - Until you check your account and see the "-$300" balance thanks to charges and overdraft fees.
See, your card will just keep right on working even though the money isn't there. Every time you use it, the bank charges you $35 bucks.
I work for a somewhat regional bank in IL. So I see both sides of this issue pretty clear, and I'm not sure what side I would be on.
We charge $36 for overdraft fees, or what we call "bounce protection." It already setup on all accounts. For us, there no benefit to not have it. If you write a check and go into the negative, you get charged $36 but will paid it if it within the $800 limit, now if you didn't have it, we still charge $36 nsf fee, and return the check, and so your bill doesnt get paid and you get late fee/returned check fee. We alway paid Debit cards so it wouldn't matter for that.
Now 2 year ago, we only charged $20, then it jump up to $36, I dont see a reason why it should be that high. And we charged after 5 days of being in the negative, $5 per day. That seem pretty high, and the fee can get really high, if you didnt know you overdraft. But for us, we alway list tranactions as credits first, then debits so that helps.
We get customers in wanting to know why they get charged, then we ask if they keep a checkbook, and about 75% of the times, they dont. They just go off the balance they get, and forgetting checks that havent take in yet. Or writing a check, knowing the funds arent there, and trying to funds in before it come thur, but with check 21, it alot faster now.
Then we had customers who would come in to withdrawal all the funds and go into the bounce, it was like a $800 advance for just $36, I'm sure that is cheaper than those payday loans. We ended up not doing that anymore.
The current rule - as I understand it - is that in order to invest in a hedge fund you need to have an income of $200k and $2.5 million in assets. How about similar rules for less sophisticated financial products?
Everyone would be able to have a simple checking account, a 10% down car loan and a 20% down 30 year fixed rate mortgage.
Anyone who wanted to utilize more sophisticated financial products, would have to pass a series of financial and educational hurdles before they were allowed to access them. You want a credit card, you need an income greater than $30k and you need to pass a financial literacy exam. You want an adjustable rate mortgage, you need an income above 50k and a high school diploma.
The ignorant and unsophisticated would thus be protected from themselves.
And how about if there's a test so you don't need to go to a doctor to get certain types of proscription drugs? Count me in.
Though your proposals (particularly in regards to income) would make it a lot harder for low income folks to get loans. I'm all for it, but in the past such practices were derided as 'redlining' and 'racist.'