With that kind of profit margin, it is not surprising that 70% of banks offering
overdraft protection will let customers withdraw money from an ATM and 89% will
allow a sales charge without informing them of insufficient funds.
Additionally, three quarters of banks automatically enroll
new customers in an overdraft protection plan and many of the
large banks will not let customers opt out.
For low income customers, the risk is ever present. A study by the
Center for Responsible Lending discovered that more than two-thirds of
overdrafts occur with people attempting to pay expenses that are unavoidable -
bills, transportation, housing, medical and food. Further, 8% had money deducted from their government aid, social
security, unemployment, welfare or veteran's benefits to cover the fees.
Here are four ways the larger banks will try to confuse customers into
fees:
1. The "Free" Checking Account
Years ago, major banks either required a monthly fee or a minimum
balance on checking accounts which meant most people living paycheck to paycheck
lost money when they put it in the bank, the fees far surpassing any paltry
interest they could earn.
That practice has been replaced by the free checking
account with supposedly no minimum balance required. This pitch makes it easier for sales reps to
gain new bank customers who might otherwise have searched for a bank with a more
lenient option but in reality there is a catch. A customer has to open
a savings account to accompany the checking and agree to allow an automatic
monthly transfer, usually $75, to the savings. The sales rep will tell customers
that it is to help them save money as if the bank had an altruistic about their
well being.
In actuality what this arrangement does is two things. One, it
allows banks to charge a fee when the customer does not have $75 to transfer.
The fee is not taken from the checking account, however. It is assessed to the
savings. If the customer hasn't put any money into the savings which is often
the case with a low income customer opening a new account, there is an
additional charge for each day the savings account remains in the negative due
to the fee. There have been widespread complaints that customers aren't informed
this when they open accounts and by the time the get the letter in the mail
notifying them, they have lost anywhere from $25 to $45. In some cases, such as
Wells Fargo, the letter will inform them the transfer did not go through but
will not notify them of the fee, prolonging the daily penalty being assessed.
Secondly, the transfer arrangement also adds confusion regarding
the checking balance. A person living paycheck to paycheck is going to need that
money bank in their checking account. If the customer forgets to transfer the
money back to cover a charge, the bank gets to assess a fee when it has to do
this itself.
2) Pending Transactions
When a customer makes a purchase on their debit card, the transaction is not conducted
immediately, particularly when the purchase is charged. There is a stage where the funds are held on one's account, then a
stage where the money is actually transferred to the merchant a few days later.
This can be confusing when one checks their online
statement as the purchase initially will appear as a pending transaction and the
money is deducted from the
available balance. However, it is common for that charge to fall off a couple
days later, falsely raising the balance before eventually going through. Overdrafts
often occur as a result of people trusting the bank's accounting of what their
account balance is.
Banks claim this is just how their software works but
there are other people who will tell you the program can easily be changed.
3) Manipulation of Transaction Chronology
Pending transactions are also useful to banks when an
overdraft does occur. There was a lawsuit filed against Bank of America last
year when it was discovered, as is common practice in other institutions, that
the bank regularly shifted the chronology of transactions to be able to assess
the maximum number of overdraft fees. In other words, if someone made a $7
purchase in the morning and a $60 one in the afternoon and had only $50 in their
bank account when the day started, the bank put the $60 charge first so the
second also would fall into overdraft. Banks do the same thing with pending
transactions, which, although they assess it to a balance at the onset, they can
shift it and claim the charge was not completed until a few days later. So if
someone makes a purchase on Monday, another on Tuesday and a third on Wednesday,
the latter falling
into overdraft, the bank has the power to shift the Monday
and Tuesday transactions to occurring after the Wednesday one in order to charge
more fees.
When these fees are contested, most banks will overturn them but
even if six out of 10 people contest them, the bank still makes money on the
other four. Thus, it's a win-win policy for them. They aren't in violation of
the law because they can claim it was just a mistake and overturn it if contested but
if it is not contested, it's no risk profit for them. According to the FDIC, 54%
of larger banks do this customarily while less than a quarter of small banks do.
4) Check Delays
When a check is deposited that is drawn on a bank in the same
region it should take just two days to clear but almost everyone knows this isn't
always the case. In addition, an out-of-state check can take between nine to 11
business days to clear - meaning if holidays are involved it could total well
into the third week. In one study, 30% of customer who incurred overdrafts
claimed it was because of this.
The safest way to avoid overdrafts is to apply for a line of
credit, an option for those fortunate enough to be working these days or for
those who are
more financially solvent. This is essentially the same thing as the bank
offering a customer a credit card, meaning the bank allows one to go into the
red and pay later with interest. Of course, like credit cards, this encourages
the practice and creates debt, which is always lucrative to the loaner. Thus,
the only way for people on a tight budget to avoid overdrafts - unless they want
to spend hours every week being their own accountant - is to accept more credit.
With the current Move Your Money campaign, some have questioned whether moving
their $1,000 balance to
another bank will have much affect. These figures should erase those doubts. Just
like the credit card companies prefer those who don't pay on time, the Wall
Street banks compete heavily for the average Joe as much as the wealthy because
the $33 fees add up -- to nearly $40 billion.
