45% of all banks would not have made money if not for overdraft fees

[vorlund]

Even as regulators crack down on abusive mortgage and credit card practices, another type of lending threatens to mire consumers in a credit trap.

It's called "courtesy overdraft" and has long been used by banks to automatically pay transactions that account holders don't have the money to cover — and then charge them a steep fee. For years, banks have made it easier for customers to overdraw their checking accounts, aided by a cottage industry of consultants who make big money by helping to wring fees out of consumers, a USA TODAY analysis finds.

...more...

http://www.usatoday.com/money/perfi/credit/2009-07-08-banks-overdraft-fees_N.htm


I know this is old news, but with the crackdown on predatory credit card lending practices and payday loan businesses recently in the news, this is just one more thing that should be addressed. The banks have already received insane amounts of money from everyday working and middle class taxpayers, yet they still feel the need to wring every last cent they can from those who are actually out there doing the work.

[MercutioATC]

1. Alternately, "A lot of people are overdrawing their accounts".

Overdraft fees are clearly detailed in the agreement you sign when you open an account.

Don't want to pay overdraft fees? Quit bouncing checks. It's that simple.

[Systematic Chaos]

10. Because everything in life is just that simple.

:eyes:

[FBaggins]

14. No... but this is.

The bank can't do much to force you to spend more money than you have.

Many of the practices are hard to defend (and many of those are changing) - but the simple truth remains that if you never spend money until you have it, they can't charge you an overdraft fee.

[paulsby]

2. good

that means that people doing overdrafts are subsidizing those of us who don't. the irresponsible subsidizing the responsible. iow, the banks CAN charge lower fees to all, because they are getting significant %age of their profit from overdrafts

[vorlund]

3. Banks are using overdraft fees as a major source of income

The article talks about how what was once a courtesy to good clients has been extended and is being used as a major source of income for banks. Many banks do not use a FIFO (first in, first out) system of accounting. Many of them will hold back large checks for as long as they can, hoping someone goes over by the slightest amount- or would if that large check were to go through at that time. If someone makes two small purchases, followed by a large purchase that puts them over, the bank will put the large transaction through first, then the two small purchases and charge two fees instead of one.

I used to just have a single checking account with an associated card that could run as debit or credit. If I were to go out to eat in the middle of the month (the card is going to be run as credit) the charges would go through immediately. If I were to do the same thing towards the end of the month, when I paid my rent and utilities, the charges would be listed as pending for up to a week and a half. Also if I had a lot of money in my account and wrote a large check, it would go through right away. If I didn't have a lot of money in the account then the check could take up to two weeks to finally process. When it DID process it would be taken out based on the date on the check, not on the date that they finally processed it.

However, if I was depositing a check in my account the bank would credit my account on the day that they verified that the funds were available from the other account, not on the day that I deposited the check. This makes it kind of difficult to know exactly what your 'available' balance is, unless you're checking your online accounts several times a day.

Sure- it's your responsibility to know how much money you have in your account, but with people using debit cards to pay for purchases instead of carrying cash it is becoming increasingly difficult for people to keep track of exactly how much money they have in their accounts at all times. This is especially true of people who don't have direct deposit and are barely scraping by as it is. The bank can rush debits and delay credits, manipulating the account so that an overdraft fee is charged when the account SHOULDN'T have registered as overdrawn in the first place.

Despite all that- if a bank can't turn a profit without relying on income from overdraft fees, which can be in the 3000% APR range, their business model isn't sound enough that they should exist as a business.

[paulsby]

4. i disagree

it's a good business model. banks, like grocery stores,. operate on a razor thin margin with many products. and have become quite competitive, which has been a boon to the consumer. i get free ATM use, an EXCElLENT mortgage rate. the only thing i have ever paid a fee for is the occasional wire transfer. it's much like how many gyms turn a profit. a relatively small %age of users use the gym frequently. many others sign up then rarely if ever go. its not difficult to avoid overdraft fees. i got overdraft fees a few times when i was in college, young dumb and full of ... and then i learned responsibility.

[o480]

6. Illegal Business Model

It may turn a good profit, but alas it is illegal, and in this case the law is made to protect the consumer. Does it matter whose costs it subsidizes if it is illegal?

[happyslug]

5. Most overdraft fees are illegal, such fees violate Contract law.

The problem is to get your money back you have to sue the bank, prove the overdraft had nothing to do with the cost incurred by the bank do to the overdraft. Once that is shown, you get a Judgment equal to the Cost of Filing in Court AND the overdraft, no attorney fees and the Bank has the right to close your account.

Most overdraft fees are illegal for the simple reason the Courts have long ruled that any clause in a Contract that is punitive is illegal. The non-breeching party in a contract can sue the breeching party for any cost their incur do to the breech, BUT such Judgments are limited to what cost is incurred by the non-breeching party NOT any stated "penalty" given in a Contract if it is breeched.

Now, the courts do permit parties to agree to "Liquidated Damages" that approximates cost incurred by the Non-breeching party when the contract is breeched, but such "Liquidated Damages" MUST approximates the cost that the non-breeching party incurred NOT some fee that is designed to "punished" the breeching party for his breech.

In the case of Banks and overdraft fees, the issue is how much did the bank incurred do to the overdraft? Most banks cost to handle such overdrafts is less then a Dollar, but the fees can be as high as $50.00 (my bank charges $32.00 according to its web site). Thus a $5 dollar overdraft fee could approximate the cost incurred by the Bank do to the overdraft (i.e. we are NOT talking about the amount of the actual check, which would be clearly damages, but only the additional fees incurred when the overdraft occurs). On the other hand, the $32 or more overdraft fee is clearly intended NOT to approximate the cost incurred by the Bank but to punish the person who wrote the overdraft, and that is clearly punitive in nature and thus a violation of Contract law.

Now, having said the above, how to you get the overdraft eliminated? First you can try to get the bank to waive it, most banks will if you go to the bank and complain. If that does not do it, you can write them a letter, if that does not do it you can file in your local Justice of the peace (Or whatever JPs are called in your state) for the amount of the overdraft. At that point the bank will most likely drop the overdraft and even pay the filing fees, but then tell you to take your bank business elsewhere.

Most people can NOT take the day off to complain to the Bank, nor the day off to file and then go down to the Justice of the Peace for the hearing, thus most people accept the overdraft and the Bank keeps the money. High Overdraft fees (i.e. more then $5) are illegal, but the only way to enforce the law is to file an action in court every time it happens, and that is difficult to do for most people. Thus these fees are a profit center and will continue to be so until someone does something and no one will. This we have to attack these over draft fees every time they come up by asking for them to be repaid and if not repaid file in Justice of the Peace Court to get them returned. If enough people did this such overdrafts will quickly end, but it will take a lot of people filing in court against a lot of banks to get the banks to return to something close to the cost their incur do to the overdraft NOT the $32 or $50 most banks charge today.

Side note: Most states have CRIMINAL Statutes on returned checks, i.e. overdraft checks returned to the person the check was written to. Such Criminal Statutes permit such people to get $20 for the cost their incurred do to the writing of the bad check. That fee is permitted by statute and thus NOT covered by the above common law rules on Contract law. Please note this is a fee to cover the costs incurred by the person you wrote the check to NOT the overdraft fee the bank charged you when the check hit your account AND bounced it back to the person you wrote it to. Since this is permitted by Statute it is legal, but notice it is a fee of the person you wrote the check to NOT the fee incurred by you when the check was bounced back to that person.

Second Side Note: In most states if you wrote a check and it bounced and it was for more then $100, it is a CRIMINAL FELONY (misdemeanor if less then $100) if you did NOT have the money in the back to cover the check (Being criminal this means you INTENDED to write a bad check NOT just screwed up on how much money was in the account). It is a defense to such criminal charges that you honored the check (i.e. paid if off before any charges were filed) or had the money in the bank, but by the time the bank received the check the money was gone (Mostly in cases when someone attached the money do to a Judgment against the Check Writer). This is NOT the type of Check writing the article is talking about but I want to make it clear to people reading the above that contract law does NOT come into play when ever someone writes a bad check, knowing it is bad AND knowing that it will never be honored by any bank. The above (Not this and the previous paragraph's comment on Criminal Law) covers checks that are honored (i.e. paid on) by the writer of the Check (Or his agent the bank) and then that bank charges a fee for the overdraft AFTER paying off the check (Or in most cases BEFORE paying off the Check as your deposit is credited to your account after the check has bounced). Overdraft fees that have nothing to do with criminal check writing AND any costs incurred by the banks are illegal penalties and this violation of Contract law.

[drew212]

8. How do I sue my bank?

I contacted my bank, and they only offered me $70 for the $120 they charged me in overdraft fees. Should I take it to the county court or just take my $70? Happyslug, what exactly do I do when filing a claim at the county court? The banker offered to refer me their attorney and said I could discuss it with him, but I knew he would have a better understanding of the law than I would. It is a local bank company, they aren't really doing anything to skew the numbers in their favor, they're just charging me $27.89 each time I overdraft.

[grasswire]

7. Closson v. Bank of America et al

From the summary of the settlement in which BofA paid out millions of dollars:

"The lawsuit claims Bank of America encouraged its customers to use Bank of America debit cards and increased the number of fees charged to customers using Bank of America debit cards through the order in which such transactions are posted and the account balance information it provides. The lawsuit also claims that Bank of America authorizes debit card transactions that will result in overdraft fees; fails to warn customers that specific debit card transactions may result in overdrawn accounts; posts debit card and other transactions in high-to-low order; and provides account balance information to customers that is not current, accurate or as advertised. In addition, the lawsuit claims that Bank of America’s customer agreements are unconscionable, and that Bank of America does not provide customers with copies of account agreements until after they open their accounts."

And so you will see that the banks do not just collect overdraft penalties, but they engineer overdrafts by engaging in re-ordered transactions and other predatory practices.

Move your money.

[aguilas_de_merida]

9. Just nationalize the banks!

Through an honest mistake, I made three small purchases under five dollars each with a Citizens Bank debit card, plus a gasoline fill up for fifteen dollars. My wife is the primary user of the card, and I asked her how much was in it, and she said around $60. As it turned out, the $60 was in the Citizens Bank savings account, and not with the debit card, which is linked to the checking account. Well, when I found out I immediately transferred $50 from my savings to cover these small expenses, but discovered I was already charged over $176 in various overdraft fees, and this continues to mount daily. Now it is up to $211. I have never had an overdraft with this bank before, and they refused to rebate the fees. As I am a disabled vet, I am on a fixed income and can't afford to pay any of these mounting fees, and Citizens Bank won't close the account and just bill me. They just keeping adding up these fees and tell me they can't do anything about it because that's the "way the computer is programmed." In other words, their own employees tell me they are powerless to help their clients. Citizens Bank is not a very good corporate citizen and I would recommend that any readers of this blog refuse to let them even use one penny of your hard-earned money. I am a disabled veteran on a fixed income and simply cannot afford to pay these. I am just going to let it go until they close the account on their own volition and then I will hire an attorney and sue them for the emotional grief and stress they have caused me.

When I think about the way that we, the American people and taxpayers, bailed out the banks in their time of crisis, and consider the way they slap their long-time clients and depositors with these outrageous fees, then I realize that I have become radicalized to the point of voting for an economic democracy in this country, i.e. help Obama do all he and his administration can to nationalize the banks and restore economic faith and trust in the American people with the Department of the Treasury and a Bank of the United States. Capitalism is inherently evil because if you have winners, i.e. the greedy and unscrupulous bankers, then you must have losers, which are WE, THE PEOPLE. In the meantime, while I am helping to build an economic democracy with my votes and activisit participation to regulate the hell out of all the banks, I will be opening a credit union savings account and doing all my purchases in cash and paying bills with money orders. Death to the fascist insect that preys on the heart of the people---- just nationalize the banks already!!!!

[grasswire]

11. how about if you tell the bank manager...

...that you are a member of a 100,000 plus activist organization on the Internet whose members are just itching to take action on your behalf and tell your story? I'll write facebook messages for ya!

Or how about dropping Michael Moore's name? Get in touch with him and tell him your story. He's available by e-mail.

Or get in touch with your local TV reporters or newspaper.

Don't let them do this to you. The bastards.

[OllieLotte]

12. Or get a calculator and figure out how much $ you have...

before you write a check.

[grasswire]

13. your response is ridiculous

Do you not understand that banks are engaging in deceitful practices in order to entrap customers in overdraft fees? It doesn't take a bounced check to get slapped with a fee.

[FBaggins]

15. No it isn't.

You may feel that they're "deceitful practices" - but the consumer has every ability to avoid them.

And now the fight against such fees (charged only to people who spend more than they have) means that the days of the free checking account are essentially over. Within the next year or two, most banks will transition back to checking accounts with monthly service charges unless you keep a significant balance in the account. Now everyone will pay rather than just people who can't/won't manage their finances.

[girl gone mad]

16. They print money out of thin air...

they get trillions in taxpayer funded bailouts and they pay no interest on loans from the Fed.

They can afford to be more consumer friendly.

[FBaggins]

17. Yes... They do

But that's what they're designed to do.

Since when did "consumer friendly" mean "enabling people to handle their money irresposibly" ?

Yes... Some of the banks were themselves irresposible... So don't deal with those banks.

[Statistical]

18. "enabling people to handle their money irresposibly"

Come on what a laugh.

Overdraft fees aren't about responsibility it is about maximizing revenue. If banks wanted to teach "responsibility" they would simply make things work how they did in the 1970s & 1980s. If your account has no money.... the debit card is declined, the check bounces, and ATM "can't complete this transaction".

Now that teaches responsibility however the banks started realizing that promoting less responsibility (don't worry we will cover it for a fee) was far more profitable. Like anything else in financial industry they weren't happy with $14.95 overdraft fee. They started working to maximize fees, reorder charges to increase fees, have charges applied on varying days to make determining balance more difficult, allowing debit & ATM transactions even when account is over-drafted, and ramping up fees 500% in a decade.

None of that had anything to do with responsibility. It had to do with increasing profits by $500 billion for essentially nothing.

[FBaggins]

20. Sorry... that's not really the case.

<i>If banks wanted to teach "responsibility" they would simply make things work how they did in the 1970s & 1980s. If your account has no money.... the debit card is declined, the check bounces, and ATM "can't complete this transaction". </i><P>

And you still got a fee from the bank... AND a fee from the company that got the bounced check... AND your credit was damaged... AND you could potentially face charges.

You seem to think that "back in the good old days" there weren't any fees. That's simply wrong. What has really changed is that accessing your money (without a check on how much you actually have) has gotten easier and easier... but that doesn't remove our responsibility to only spend what we have in the bank.

<i>It had to do with increasing profits by $500 billion for essentially nothing.</i><P>

Not really true. Banks don't have much higher returns on equity/assets than they had in the 70s and 80s. So it isn't "essentially for nothing"... it's a shifting of income from one source to another. For instance, there used to be a MUCH higher spread between what banks paid in interest on deposits and what they charged on loans. There were also monthly fees on almost ALL accounts unless you maintained a significant minimum balance. The change means that the bulk of customers pay less (essentially getting their banking for free) while those who overdraft their accounts pick up the slack.

Don't imagine that the total will change much. As the recent Reg E changes take effect, expect to see the millions who handle their accounts responsibly to pay more fees and higher interest.

[Statistical]

21. Once again reality interrupts your romantic illusions of banks looking out for the consumers.

While a check can bounce banks can simply make an ATM/debit card be declined. Same thing with credit cards. They did it for decades until they realized it is massively more profitable to allow them. They called it a service or a convienence but until now the consumer wasn't given an option if they wanted that service. I need that "service" like I need a hole in my head.

The new law doesn't outlaw fees. It simply requires that consumers consent to them. If they are such a great "deal" for the consumer then consumers will opt in and nothing will change right?

Banks can make plenty of money without raping the consumer.

At USAA I have:
* no overdraft fees ever.
* free checking & savings
* interest on both checking & savings (not much but comparable to other banks)
* free online bill pay
* free debit card
* free ATM use (and USAA refunds ATM fees)

Their rates for car loans & mortgages are comparable to other companies. Their credit card is the best I could find.

So how did they figure out how to be profitable without regressive fees (and even worse intentional farming of those fees)?
From your claim it should be impossible. USAA was already acting upon Reg E business model before Reg E was even proposed.

[FBaggins]

23. Nowhere did I say that it was a great deal

Nor did I say that they were "looking out for the consumer." If you can only debate strawmen... why post?

Like any other business, they are in business to make money. To only charge a fee for things that I have the ability to avoid without expense to me (rather than make me keep $1,000 in the bank at all times to avoid $10/month and/or charging me a 1% higher rate on a car lona) seems preferable.

The new law doesn't outlaw fees.

And I never said that it did.

I need that "service" like I need a hole in my head.

Then don't spend money that you don't have. Your grandmother used to keep a book in her purse and could tell you to the penny how much she had in her account and whether she could write a $10 check for groceries. Why can't you?

So how have they figured out how to do it and major banks can't?


You seriously don't know? You really think that the only difference between them and a regular bank is that they do their jobs better (note - they DO do their jobs better than 95%+ of banks... but that's not all there is to it).

[Statistical]

24. So it is impossible for the major banks to exist without opressive and regressive fees?

If so then they should go under and be replaced by banks who can offer a service and value for the consumer.

Does USAA profit from me? Of course they do but I never feel exploited. I never feel they are gaming the system to maximize the amount of profits they can squeeze out of me. I never feel they have a compulsion that no matter how much profits are they have to figure out the next scheme to extract more and more and more and more from the same stone.

If major banks can't survive in a era when consumer is given choices & protection well FUCK THEM! They aren't essential. Other banks who can compete will step up and take market-share.

[FBaggins]

26. Another strawman?

As I said before, the banks aren't more profitable than they were back in the 70s and 80s (of course ignoring the last couple years where they weren't profitable at all in many cases). They just make their money in different places. Places, I repeat, that YOU have control over at no expense to you- when you didn't before.

Does USAA profit from me? Of course they do

No. They don't.


Care to try again? it would help if you try to answer the question in my last post.

[Statistical]

29. Return on equity for banks exploded in first half of this decade.

Return on equity for Bank Of America hit 20% in 2004 and 12% to 22.69% in the first half of the decade.
This compared to a historical average (1989-2009) of 6.72% ROE.

Now the return has fallen since then but that was due to the stupidity of loaning money to people who couldn't possible pay it back.

You are saying this explosive growth in return is just coincidental to the fact that BofA was recently sued (and lost) for intentionally farming overdraft fees?

[FBaggins]

30. Were you going to get around to correcting your statements about USAA?

Or shall we just pretend they never happened? :)

Return on equity for banks exploded in first half of this decade....You are saying this explosive growth in return is just coincidental

No... not coincidental... but what portion of it do you think came from excessive overdraft fees as opposed to the "profits" on those loans that they never should have made?

Changes in overdraft fee structures occurred well before the start of the decade.

Historically, a well-run bank would consistently produce an ROA of about 1% to 1.25% - Prior to the crash, MANY banks were topping this, but few were doing so from normal bank operations. If, for instance, you expand into insurance sales, that boosts the "R" without touching the "A".

The real question is how much these specific overdraft fee games (not the "normal" overdraft fees that have always existed) have been compared to the now lower fees/rates for other traditional banking services. I think that you'll find that over the next decade or so, the "average" middle-class customer will pay more (without improving bank profits) this way than they would have with the current structure.

[Statistical]

19. Not all banks will.

USAA charges no overdraft fee and has no monthly fees on checking.

Banks don't "need" to charge for checking. Some will because they are addicted to free money.

Even without overdraft fees banks collect money on
a) credit spreads (give 0% on deposits & collect 6% on loans)
b) merchant fees (credit card & debit card interchange fees)
c) premium services (investing, wealth management, cashier's checks, etc)

Many banks have simply gotten for fat and inefficient and essentially bad at banking that they can no longer be profitable without billions in worthless fees.

However the idea that 100% of banks will charge for checking is just silly. Some will but many won't.

[FBaggins]

22. I love USAA

I've been with them for decades (and they have hands down THE BEST service level in the industry - and that's not just my personal opinion)... but they're hardly a normal bank. The vast majority of people can't deal with them and they have unique advantages that normal commercial banks don't.

BTW - they do have an overdraft fee.

Even without overdraft fees banks collect money on
a) credit spreads (give 0% on deposits & collect 6% on loans)

Much smaller than in decades past.

b) merchant fees (credit card & debit card interchange fees).

Also shrinking (on a per-item basis... but there service is far more common now).

However the idea that 100% of banks will charge for checking is just silly. Some will but many won't.

Did I say 100%? No... what I said was that it used to be the norm and soon will be again.

[Statistical]

25. It won't be the norm.

Consumers get use to something and raising prices after the fact is difficult.
Some banks will charge fees and other banks will advertise they don't and the fee heavy banks will lose business.

Also bank spreads are at historical lows.

Deposit rate is essentially 0% right now.

Car loans are at ~6%.
Mortgages are ~5%.
Credit cards at 19%-29%. Hell even for perfect credit it is hard to find something below 10%. Couple years ago I had a credit card at 7.9% fixed.

More than enough spread to an honest bank to survive without encouraging (farming) fees.

[FBaggins]

27. Yes... it will.

The biggest banks are already announcing the end of the free checking account.

You will always have a choice... there will always be banks that don't charge that fee. But it will be a tradeoff that won't have as large an impact on where people bank as you or I might hope.

Do I move my checking account from a bank that has a branch on every corner from NY or Orlando to a bank that has fifteen branches that aren't very convenient for me? To avoid a fee I wasn't going to pay anyway? Some will... some won't.

[Statistical]

28. "To avoid a fee I wasn't going to pay anyway? "

Except now you will be paying that fee and the need for most people to have a branch on every corner is over rated.

With direct deposits, online banking, increased use of credit cards, and ATM on every block the need for a branch is much less than 30 years ago. More likely the bank with branch on every corner will be closing branches. There simply is more diversity on how to gain access to funds and they no longer have the ability to rape the consumer with services they don't want/need.

So while the majors (who have become addicted to risk free profits) may start charging for fees the fact that the fees are upfront will and people can't justify it with "To avoid a fee I wasn't going to pay anyway? " means they will lose market share.