In my life, I've always been one to shy away from banks. Mostly because I just don't like the idea of someone else holding on to my money. And also because they give me a little Visa card, and I'm way too unreliable to use it properly. But then, I'm quite aware of the problems I can get into.
A lot of people aren't, and can end up owing a bank a significant chunk of change. Consider the sob story of the Vidals, who ended up with $926 in overdraft fees.
Sure, there's always the argument that you should be wise and you should be smart with your money and be neurotic about your checking account, and so on and so forth. To a point, I agree -- you should take a proactive part in your personal finances. However, banks have a very large incentive to make things difficult and, for want of a better word, milk you for all you're worth.
Part 1: Background Information
What is an overdraft? To get up on the banking industry lingo, an overdraft is when, for whatever reason, the bank pays out more from your account than you have in it. Say, you have $100 in an account, and write a check for $150. Should the bank pay it, they would "overdraft" your account to do so.
Part 2: Overdraft Protection
Here's the problem. In the old days, a bank manager would, at the end of the day, get a list of all the accounts whose activity would cause them to go into the negative, and make decisions on each one, on which checks to pay and which to return, and so on and so forth. "Good" customers or customers with whom the manager had a good relationship may get the checks paid as a courtesy. Calling the bank and saying, "Hey, Phil? Hi, it's me. Listen -- My mortgage check is going to come in soon, and I'm not paid 'till Friday.. can you cover it for me?" And the bank manager might say, "Sure! We still on for pool Thursday?" and so forth.
As banks grew, such special treatment became rarer and rarer, until banks would just return all checks with insufficient funds. While the bank customer may be embarassed by this, it would usually save the customer from a negative account balance, and helped keep the bank "in the black"
Part 3: Enter Overdraft Protection
Overdraft protection is what we have come to know and hate as costing us $32 (US Bank) every occurance and sometimes, $7 a day (US Bank, again) while the account is overdrawn.
Bank customers complained. "Why are you returnning all my bad checks to the merchants!" people would shout. So the banks threw up their arms and said, "Fine, we'll pay them! But it'll cost you!" and thus, the ad-hoc method was born. Banks developed sometimes sophisticated methods to determine which checks to cover. There was usually a limit to how much you could overdraw your account, and a fee associated with the activity was assessed as well as the amount of the check. That $32.
Bank customers complained, "$32 is too much!" and other forms were created. A line of credit, where you have an unsecured loan standing by, waiting for you to overdraft, and then a certain amount is borrowed from the line of credit to pay the overdraft, and you are charged interest on it. Linked accounts with another checking or savings account were offered, so you could drop $100 in a savings account and "forget" about it until needed.
Finally, what's come to be known as "bounce protection" is offered, and is basiclly an ad-hoc system, as done by computers, and automatically.
Part 4: Why It Is Important
According to CBS, in 2004, banks took in a total of $35 billion in service fees. $11 billion of that was in the form of NSF and bounced check fees. The rest are various account fees, such as the infamous "teller" fees, minimum balance requirement fees, funds transfer fees, et cetera.
For some perspective, the federal budget budgets $116,280 million for military personnel. On what banks have collected in overdraft and NSF fees, our military could pay its soliders an actual living wage.
Take a look at some small excerpts from the New York state budget.
(in millions of dollars) |
2006 Year-End Result | Total |
School Aid | $1,706 |
Public Health | $731 |
Higher Education | $598 |
Transportation | $1,024 |
Now, a handy little line from the Bank of America's most recent Annual Report with data for 2004:
Service Charges: $6,989
Part 5: How Did That Happen?
I'll keep it short, because, mostly, I'm getting tired and want to go watch a movie. HAH! Journalistic integrity flushed down the toliet faster than Judith Miller's career when something shiny comes to my attention.
Basicly, it breaks down like this: Currently, all the "overdraft protection" options are legal, and a customer has almost no say in how they want their account to be treated. Most banks do not allow you to say, "Please do not overdraft my account, I can handle the embarassment."
Banks also reserve the right to process transactions in any order, over a period of any number of days, as they see fit. This means banks can, and will attempt to process the largest transaction of the day first, in hopes that it will overdraft your account, generate a fee, and then process the next largest, and so on and so forth. Your morning cup of cofee, for $3.25, could end up overdrafting your account. Consider the day's events:
What I do | Balance in my account |
Wake up | $500 |
Get a Mocha, $3.25 | $496.75 |
Hit up the ATM for cash ($200) | $296.75 |
Swear at roommate, pay late power bill, $123.73 | $173.02 |
Cheer, deposit paycheck! $1,000 | $1173.02 |
Bachelor party! $700 (at once) | $473.02 |
So you're a good little consumer! You put in $1000, and you only took out a total of $1076.27, so your ending balance should be just shy of the original $500 you had, right?
bzzzzt!
Banks will look at this day's transactions and spring a little boner. Here's what they do:
Item | Bank Action | Balance |
Opening Balance | -- | $500 |
$700 party | paid, overdraft fee $32 | -$232 |
ATM, $200 | paid, overdraft fee, $32 | -$464 |
Power Bill, $173.02 | paid, overdraft fee, $32 | -$669.02 |
Mocha, $3.25 | paid, overdraft fee, $32 | -$704.27 |
Deposit, $1000 | deposit $1000 | $295.73 |
Or, in short, that bank just made $177.29 off of you.
Part 6: What's Being Done
The only thing I could find, aside from a bunch of whining, and a bunch of people saying, "stop whining and stop overdrafting" was a bit of legislatuion titled the "Consumer Overdraft Protection Fair Practices Act", H.R. 946, sponsored by Rep. Julia Carson and Rep. Barney Frank.
The bill does two basic things -- it prohibits advertising overdraft "protection" as free, and requires that customers of banks "opt-in" to the overdraft protections as well as notifying the customers at the time of a transaction (in the case of electronic things) that this is going to overdraft the account and give the total cost of the transaction.
Part 7: Next up
Why credit card companies are evil, too!
(Also, can someone fix the tags for Frank & Carson? I can never remember where they're from)