Today’s Financial Times highlights a possible target of regulatory action: bank overdraft fees. And those fees are not distributed the proverbial 80/20 pattern, with 20% of the accounts contributing 80% of the activity, but 90/10. And that 10%, not surprisingly, is in consumers with the lowest credit scores.
And the biggest banks are the ones with the most aggressive fees.
What is disappointing is that this FT article failed to indicate what costs the banks incur in processing overdrafts. Although this activity is presumably very profitable, it would be nice to know by how much.
From the Financial Times:
US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s…The fees are nearly double those reported in 2000…
The Federal Reserve is working on rules on overdraft fees, and rules on customer charges could be a priority of the Obama administration’s proposed Consumer Protection Agency if approved by Congress.
Data from Moebs Services, a research company, show that the crisis has prompted many banks to lift charges on overdrafts and credit cards in order to boost profits.
The median bank overdraft fee has this year rose from $25 to $26, according to Moebs, the first time it has gone up in a recession for more than 40 years…..
Overdraft fees accounted for more than three-quarters of service fees charged on customer deposits…
The most cash-strapped customers are the hardest hit by such fees, with 90 per cent of overdraft revenues coming from 10 per cent of the 130m checking accounts in the US….
Banks say that the fees compensate for the risk they incur when they pay on behalf of customers who do not have enough money in their accounts….
The highest overdraft fees were charged by the largest banks, said Mr Moebs. At banks with assets greater than $50bn – a group including Citigroup, Bank of America, JPMorgan Chase and Wells Fargo – the median overdraft fee is set at $33.
At BofA, a customer overdrawn by as little as $6 could trigger a $35 penalty. If the customer does not realise they have a negative balance and continue spending, they could incur that fee as many as 10 times in a single day, for a total of $350. Failing to repay the overdraft within a few days results in an additional $35 penalty….
Chase has tiered overdraft fees – the first overdraft within a 12-month period is charged at $25, the second to fourth at $32 and the fifth at $35….
Consumer advocacy groups point to very low loss rates on overdrafts for all banks and argue that overdrafts are the least risky form of credit, while being the most expensive for consumers.
Eric Halperin, director of the Center for Responsible Lending said: “The banks own your pay check before you do, so the only way you can default on your overdraft is if you choose to open another account and deposit your income elsewhere.”
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you have no idea i live on federal disability about 14000 a year and to cover medical scripts and food i paid last year about 3700 in overdraft fees so i can survive without the bank covering me im homeless and without food or my medication, my bank charges 35 dollars then sustained fees for about 350 dollars a month
Overdraft fees at Wachovia (Wells Fargo) are actually $70 now but they'll "forgive" 50% of it.
Unfortunately, Rahm Emmanuel has made a deal with the banks that there will be no net reduction in fees as part of regulatory reform. In return, the banks have agreed to a plan where everyone is mandated to have an overdrawn account at either Bank of America, Chase or Wells Fargo, and all financial regulatory powers are exercised by Alan Greenspan's head preserved in a jar of formaldehyde.
And thanks for bringing back open comments. I don't have a blog and I couldn't figure out how to work that Open ID thingie.
Hmm,
Back in the 90's, when I worked for a processor, the cost of a returned check was under $3, and they were well on their way to drop that price.
With an overdraft, the cost to the bank is based on the transfer of money to cover, which is automated to near nil, + the cost of floating the money, which right now is also near nil. Add to this the cost of unrecovered overdrafts–based on my last understanding of bank risk loss rates, should be under 10%, even with the worst offending customers.
So overdraft fees are as close to pure profit as a bank can create today.
Guillotine the bankers
Thank you Yves. The victims of these bank practices are the poorest amongst us. FT: Banks make $38bn from overdraft fees
“Overdraft fees are there for a reason, we take on a lot of risk,” a senior banker said. “It’s a service to our customers, they want us to pay their overdrafts.” That's is a lie. And, worse, the article fails to provide 'balanced' reporting.
Customers have no choice. Banks manipulate posting and deny recent up-to-date balance information for bank fee profit opportunities. The banks use 'gotcha' techniques, among them neglecting to perform the most basic bank checking account service to provide an accurate recent balance (which is always available to them), but instead withhold that information from checking account holders for the error opportunity and exorbitant fees. In the case of debit cards where previously charges had been "Declined' when funds were not available, banks may now pay when there are no funds available, declining to decline, and charging an overdraft fee of $35 per by, in my case, HSBC. These cards have been sold as a convenience. It is hardly convenient to maintain a running balance as opposed to an approximation when one is making the rounds of shopping for necessities. Banks also collect merchant fees for every card transaction.
eChecks: although funds are held for payment immediately, the amount is not deducted from the balance shown until after the check has been 'cashed,' increasing error profit opportunities. The amount can be posted at the bank's discretion, another potential profit opportunity for NOT providing service; like profits from no-calorie food served to the children of working parents that keep them hungry, needing more and endangering their health by fattening -but I digress.
Where a series of checks and withdrawals are presented on the same day, the banks charge the largest amount first to generate the largest number of overdrafts. A recent experience: after time consuming argument with HSBC India rep on the phone, and because (they patronizingly said), I had never had an overdraft, they agreed to refund $35 (no apology) of a $105 charge I was shocked to see for 3 overdrafts at $35 per:
1. $60 cash withdrawal at my bank branch ATM (no emergency bill pay there)
2. $30 eCheck (if any time stamp, smooched and unreadable on the back of the check)
3. $4.39 debit card charge
These were posted as occurring on the same day, although the eCheck debit timing is presumably discretionary since no proof exists for the customers' knowledge of the time and date it actually cleared. Unfortunately, it is fair to assume the bank scams that as well. Had the eCheck been posted first, the ATM for $60 should have been declined and, after a $35 fee charge, the $4.39 also declined. The overdraft fees were not posted to the account until the day after the charge was generated creating more opportunity for customer error profit opportunity.
The bottom line is that the finance industry has successfully stripped governance from their business practices to the point where banking non-delivery of services are NORMAL; sometimes referred to as fraud and extortion.
Furthermore, when I complained at the teller window (a waste of time, I know, but I was frustrated), the teller is trained to offer a solution immediately launching into a sales pitch for 'overdraft protection,' a small line of credit for exorbitant interest rates that research has shown poor checking account holders who commit overdrafts will likely default on, providing the bank with another, but more steady stream of sub-prime lending interest charges which, in the case of people whose welfare and SS checks go directly to the bank …yuck!!!
Now, is it credible that banks automatically and without authorization pay overdraft checks for the protection of their poor clients who risk having their lights turned off if not for the benevolence of the dear bank …
"Banks say that the fees compensate for the risk they incur when they pay on behalf of customers who do not have enough money in their accounts…."
I CALL BULL-oney!
The main screw job is the banks have taken it on themselves to cash a check that should BOUNCE! I got caught in a fee spiral twice and both times I closed my account. Once I did buy the proverbial 6 dollar thing the day I went overseas for two weeks. I got home and knew I was broke, but my account was like -300 bux because of the daily O/D fee adding up! 25-35 $ buys a lot of money orders, screw banks!
Very curious responses to the income banks collect in the form of overdraft fees. If you write a check in an amount greater than your current balance you potentially create an over draft. Now in most States that was/is a potential felony. Now if you have an account that permits overdrafting you are borrowing money.
I see the $38 billion as something very insidious that points to the fact that too many people are intent on living beyond their means. As to the guy who's homeless, he has another problem that we, as a society, have to provide assistance to. This is an arena where organized religions are failing us by not providing shelter and sustenance to those who are in peril.
I remember in college trying to deal with this line of logic.
The account was overdrawn, but it was because of an unauthorized charge to the account. I asked them to show me authorization for the draw. They said that they were under no obligation to do so.
The then told me that I was responsible for keeping track of the balance. I explained that I could not keep track of the balance when the bank I was dealing with allowed unauthorized charges. They said that I should wait 5-7 days to make sure that all of my charges were cleared.
So, I walk into a store, want to buy something, then I have to wait 5-7 days to make sure that the money that I thought was in the account is actually in the account. How convenient.
Just more free money (deposits) for the banks. They get the float on the long and short ends, and leave the account holder to be charged for any 'short fall'.
In the example in college I started raising my voice in the lobby of the bank asking, wait, you don't know how much money you have until 5-7 days later? In the very conservative farming community I was in this started to raise a few eyebrows.
If you know anything about tellers and banks they know exactly what they have at every point during the day, and have developed systems for dealing with this. Tellers "on next days business" are the best example of part of this system.
Try to go in on the forth day and cash a check with the teller on next days business, he all of the sudden is not on next days business.
Putting a decision off another day always makes the bank money, they get the float once again.
If you are a banker in trouble, don't do anything, pretty soon doing nothing will have earned you enough to be able to become a bank again. In that instance they are earning on money they are paying nothing for, and actually charging you for it not being there.
"I see the $38 billion as something very insidious that points to the fact that too many people are intent on living beyond their means."
This is an all too convenient comment made all too often. I see the problem being a bit more insidious than this. The shift of wealth (please read another article this day and others about the $100 million bonus pay for bankers) from the worker to the financial superstars, hedge fund managers, commodities speculators. The shift from the middle working class (the people who actually make things, things that you use and touch and really need) to people who do not provide a tangible benefit to society. We have replaced the wages of people who make needed things (don’t believe that then stop buying toilet paper for a month and see what happens) with credit. We have convinced people that they don’t need a living wage job just a job and lots of credit. Then we punish them for using that credit.
There is a line in the movie “The Big Sleep” (much better than The Maltese Falcon in my opinion). “He’s the kind of guy that will knock out your teeth then kick you in the stomach for mumbling.” Well that sums up the banking industry today.
The Gap Between the Poor and the Super Rich
http://www.mindcontagion.org/html/gap_rich_poor.html
This is just another example of how the zombie banks are just a drain on our economy and society. They're broke, so they have to find all kinds of ways to siphon more money from their customers and the taxpayers to make them solvent. That's all part and parcel of the O administrations plan to "save the banks." Because we need them, you know.
Why anybody still banks with these thieves is beyond me. We need to boycott them and put them out of business. There are plenty of small banks and credit unions that will treat you right. BOYCOTT THE BIG BANKS, for crying out loud.
"Now if you have an account that permits over drafting you are borrowing money."
It wouldn't be so curious if you did a little reading instead of living in the past where the only check was a piece of paper.
Banks do not offer an opt-out of paying your overdrafts.
In the example I gave, they allowed a $60 cash withdrawal at their own ATM (no bill paying there), and a $4 and change debit card charge that is traditionally DECLINED when funds are exhausted, delayed recording a debit for a $30 eCheck in my balance on the Internet, and delayed the charges of $105 for those 3 transactions until the following day.
The banks' pose as benevolent service provider: “It’s a service to our customers, they want us to pay their overdrafts” is just blatantly not true.
repeat: they do not offer an opt-out of paying for your 'overdrafts.' They pay them without authorization.
On the contrary they encourage by trickery the manufacture of excessive numbers of charges upon charges as described in some of the posts that you can read above.
The bank "overdraft protection" line of credit is the original sub-prime, no income, no money loan that is very profitable since, research shows they are defaulted and even they can be squeezed when their checks are automatically deposited into the bank which the government prefers and promotes.
In other words, people who are not qualified to use checking accounts are encouraged to do so by the government/banks at enormous risk -no mercy -no rule of law to protect vulnerable consumers.
The rest of us can take care of ourselves thank you.
So, don't give me that ex-Senator not soon enough Phil Gramm, "American's are whiners."
Processing transactions regardless of (success, failure) is a zero cost.
The vast majority of transactions, the entire transaction is electronic. Say a transaction has the potential of returning a negative balance. Your bank approves it anyway. Your bank posts a negative balance, then it's overdraft time. This is all software-driven logic.
Checking has upfront costs of processing the piece of paper. This is mostly an imaging job now where the piece of paper is turned into a file and the relevant bits of the transaction encoded into an electronic message.
Summary: transaction costs are almost zero.
However, I'm sure the banks will cry foul because they have to pay the warm bodies that have to listen to customers wail about overdraft fees and all of the infrastructure and regulatory compliance costs.
I have zero tolerance for all of the sob stories in the comments.
Some of you have the luxury of choices. Those of you with the luxury, chose to play the game by using ever-more complicated payment schemes that cost you way more than you are aware even when you don't get tripped-up on the rules.
When the game doesn't go your way, you cry foul.
Cash is probably the payment technology best suited for your needs.
"I have zero tolerance for all of the sob stories in the comments."
The people commenting are providing personal experience to provide information to interested parties.
They exist.
How about this personal experience: In 30+ years of banking with a variety of institutions across the USA, I've never managed to actually overdraft my accounts. This includes being a student, being unemployed and being in overseas in the Army.
Yes. Some people are living beyond their means.
Mostly, they're just f'n oblivious and don't pay attention to what they're doing.
Move along, nothing to see here.
The bank fees are ridiculous, but that is just an emotional irrelevant point because in most cases, these folks are spending money they don't have, period.
I'm sorry, but what has happened to personal responsiblity?
I see the failure of the baby boomers raising their me generation as the party(ies)to bemoan. The banks are simply taking advantage of an opportunity.
How about this personal experience: In 30+ years of banking with a variety of institutions across the USA, I've never managed to actually overdraft my accounts. This includes being a student, being unemployed and being in overseas in the Army.
The bank fees are ridiculous, but that is just an emotional irrelevant point because in most cases, these folks are spending money they don't have, period.
I have zero tolerance for all of the sob stories in the comments.
Am I perfect? No.
Are the banks perfect? No.
Two anecdata.
One day, prior to pulling cash from an account that had nearly$2000 in it, my wife found out that the balance was exactly zero. We called our bank, and it was a prenote from a 3rd party we did not recognize, and that it was not for the exact amount in the account, but that the account could not show less than zero.
The next day, a $2300 returned check put us in the negative. This was a payment from when we had sold our old car to CarMax over three months before. After frantic calls, attempts to find short term financing, and the like, our bank was finally able to stop the madness by confirming that the return was more than 90 days past posting, and so could not be returned.
Later digging found out that CarMax's bank used another bank for clearing local to us. That clearing bank had double posted the check against CarMax (though we were only paid once, of course). When CarMax's bank found the double post, they reversed the second post to their clearing bank, who automatically attempted to reverse it to us. If they hadn't taken so long to start the process, our banker estimated that it could have taken months to clear up the multiple errors by the other banks.
No, we were not living beyond our means, but could have been severly damaged by events beyond our control.
Anecdata 2:
At one point I interviewed for an ACH analyst position at a firm that had spun off from a local bank. It was an after hours job, whose purpose was to review rejected and anomalous ACH transactions that they routed for other banks. I asked why this was a full time position, and it was explained that they could get dozens per day, with the concentration on the large interbank transfers, as sometimes senders will miscode routing numbers to the wrong or a non-existant bank. How much? I asked. I was informed that most were smaller, from $20-$75 Million, but some could reach hundreds of millions.
Multi-million $ coding errors, manually caught daily.
Yes, people make mistakes, and play close to the line, but banks make many mistakes you may never see. And when they do, you may be able to convince the bank to cover their internal fees, that won't help you with the other checks you have sent, payments that bounce, etc.
I have more, but those who have no sympathy for those who have ever had an overdraft apparently lack the understanding that it could happen to them, through no fault of their own. Good luck.
What's really troubling is that these overdraft fees are affecting the people who can least afford it. Its not the upper class or even the middle class. 90% of the fees, come from 10% of the accounts.
As soon as our goverment cuts down on one angle the banks got going, their just going to get their money somewhere else.
I wrote a blog about the overdraft fees as well, check it out at http://www.thedebtgazette.com/2009/08/banks-make-38-billion-in-overdraft-fees/
As soon as our goverment cuts down on one angle the banks got going, their just going to get their money somewhere else.
___________
Well, that *is* the point of a business, after all.
"Cash is probably the payment technology best suited for your needs."
If that were even possible.
I was in a small town with one bank. I got paid via check. No bank I know will allow you to cash a check without being an account holder.
There is also the direct deposit scam now, it takes on average 6 weeks to undo a direct deposit request.
Its just one more example of banks being able to screw the little guy. A $60 dollar charge for a $3 dollar overdraft? Wait, this is beginning to sound like subprime, I would love to see the actual aggregate amount of overdraft versus the the amount of the fees collected.
Take it this way, 7% sales tax isn't that big a deal if you only spend half of your pay check, but its a much bigger deal, marginally, when you are living pay check to pay check and spending everything you have.
Very thin line, hope you never have to see it. Try living without a checking account.
I would also add that you can overdraw an account for $20 dollars, and the bank claims ignorance. Try to bounce a check for $2,000. They will not let that one pass.
So, which is it, you either don't know how much is in the account, or you do know, and let it happen. I bet the line is about $10 below the fee cost.
I have never overdrawn an account but try to keep my balances low to discourage fraud, if its not there it can't be taken.
The two times I have been charged fees for overdraft were due to bank error. Its pretty easy to fight it when you don't need money, very hard to fight against the fee on a friday afternoon with a full lobby and weekend grocery shopping ahead.
Even harder to fight with someone who doesn't speak english on the telephone.
My bank (Chase) offers what they call overdraft protection. THis links your checking account to your savings account. In the event of an overdraft, they automatically move money from your savings account to your checking account. They charge you $10/day to do this electronic transfer of your own money.
To top it off, savings accounts at Chase now pay virtually zero interest, just like the checking accounts. You might as well just move your savings balance into your checking account. But they will be perfectly happy to take $10/day from you in exchange for providing you a service of no value whatsoever.
This is at Chase, where "The Right Relationship is Everything."
Link to a GAO Office of Thrift Supervision memo that documents the difficulty of getting information from banks on their fees prior to opening an account required for comparing bank fees to make informed alternative bank choices.
"… GAO employees were unable to obtain account terms and conditions, including information o when deposited funds became available and how overdrafts were handled, for checking and savings accounts at 61 of the 185 branches (33 percent).
I just dumped Bank of America for a very small, very highly rated local credit union and I am ecstatic with the difference.
I didn't incurr overdraft fees generally (although one time a mistake on my part caused that sort of charge to trigger 4 or 5 times in a two day period… but, o.k., my bad…) No, I was charged for transferring money online, all by myself at home in my bunny slippers, too many times during one month. Yes, $9.00 in fees for self service banking between two high balance accounts!
But it truly is like finally breaking up with a jerky boyfriend. Consensual money sharing with my new credit union is just fabulous.
None of these banks would be much of a going concern if they didn't have your money! Make the move…
elsie
Please contact your bank and sign up for the program that simply declines a transaction if your account has insufficient funds. You will find your bank won't do it if you bank with BofA, Chase, Wells Fargo or US Bank. Why is that? I'll give you 38 billion reasons.
You want to see WHY they do it and HOW they do it see Denninger's post at the Market Ticker today —-
http://market-ticker.denninger.net/archives/1315-Bribed-Regulators-Another-Example.html
I once researched this issue for a potential class action lawsuit. It turned out that the banks' cost, including labor was about $0.001. LewAnne's experience is absolutely typical – many banks have a computer program that spots a potential overdraft and aligns the clearances accordingly. The lawsuit? Didn't work out. You see, the Office of Comptroller of the Currency under Bush approved all this behavior.