Overdraft protection practices draw ire, legislation

Your bank balance is running low, but you use your debit card around town to make a few small purchases — say, a coffee at Starbucks, a couple of movie tickets, and some screws at the hardware store. When you get home you find out you have actually overdrawn your account and your bank has charged you $30 overdraft fees on each of those small purchases. Complaining to the bank gets you nowhere. What do you do?

You have two options:

You can close your account and go to a different bank which doesn’t offer this overdraft protection “service” and will just decline your card if you don’t have enough money in the account. Or you can get a bunch of your friends who have big guns to go down to the bank and make them treat you “fairly.”

When Wells Fargo did this to me several years ago, I told them those overdraft charges would be the last dollars they ever got out of me, went to another bank, and never looked back. I also learned to take much greater care to watch my money. But a growing number of Americans, who apparently are too dumb to do something as simple as change banks, are clamoring for the men with guns approach.

At issue is the so-called overdraft protection service many banks offer for their checking account holders, where the bank will cover transactions even if there isn’t enough money in the account — for an often heavy price. The fees usually exceed the cost of the original transactions that gave rise to them. In addition, banks which offer this service occasionally reorder transactions so as to maximize the number of overdraft fees a customer will incur on a single day.

A 2008 FDIC study found that 41 percent of all U.S. banks, and 77 percent of large banks, had such a program. Even with its problems, some people find such a service convenient and don’t mind paying the fees. Many others, though, hate it, especially when the bank gives them the “service” when they don’t even want it, and refuses to let them opt out, such as Bank of America did to a mentally ill customer for over two years.

The New York Times has an enlightening feature on this service and some of the customers who feel they have been ripped off by their banks, which is well worth the time to read. Some of the customers have filed lawsuits against their banks over the service. Others, though, have skipped the whole changing banks option and have gone to their friends with the big guns in Congress, and one of them, Rep. Carolyn Maloney (D-N.Y.) has taken up the cause.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

“Will they be able to replace it with another fee?” Mr. Moebs said. “Not immediately and not soon enough.” . . .

Ms. Maloney said she did not push her overdraft legislation this spring because the uproar from the banking industry could have jeopardized the credit card bill.

“It was very important to provide more tools to consumers to better manage their credit cards,” she said. “And now I think they deserve the same treatment with debit cards.” — New York Times

In case you missed that news, Maloney is Public Enemy Number One for every credit card holder in the U.S. who saw their rates rise earlier this year after President Obama signed her so-called Credit Card Act in May. The Federal Reserve on Tuesday released its proposed regulations to implement the act. The regulations sound good on the surface, but the net effect will be higher rates for every credit card holder who can still get credit, and many people cut off entirely. Maloney was warned that would be the effect, and apparently “protecting” consumers means saddling them with even higher interest rates by preventing banks from giving higher rates only to the high risk customers.

Oh, and let’s prevent college students from getting credit cards, too. They’re way too dumb to understand them. Not listed in the Fed’s press release, but buried in the 841-page proposed regulations, (I made it to page 33 before I fell asleep on my keyboard; Reuters just ran the Fed’s press release nearly verbatim) are severe restrictions on how credit card companies can market to college students and on college campuses. The regulations actually call college students “underage”!

Underlying all of this are two assumptions: first, that Americans are too stupid to make decisions about their own personal finance, and second, that Americans do not already have fair options available to them in the marketplace. The latter, at least, is false; my current bank only gives this overdraft protection service to people who specifically opt in, for instance. And I’ve never had trouble finding a credit card with reasonable terms, even with “less than perfect” credit. If I don’t like the terms, I just tell the company no thanks. Sometimes they go away, and sometimes they make a better offer.

The former assumption, that Americans are too stupid to manage their own money, unfortunately just might have some truth to it. A lot of people don’t like the idea of having to think for themselves; understanding a bank account’s terms and conditions is a lot less exciting than watching a Red Sox game, and that’s true even if you hate baseball. Besides, they have their 535 drunken sailors and their fearless leader in Washington, D.C., to do their thinking for them. Which is, of course, why the economy has gone to hell.

Of course, the law really wasn’t necessary to protect Americans from themselves; they’re perfectly capable of doing this if they actually put their minds to it. Consider stored value gift cards, which have become quite popular in the last few years. A provision in that same Credit Card Act states that gift card issuers can’t charge monthly fees on the cards unless they have been inactive for at least 12 months. Most gift cards had already done this, because their customers complained about the monthly fees. But American Express has gone farther with its gift cards; as of Wednesday they no longer have monthly fees at all, precisely because that’s what their customers asked for.

Alpesh Chokshi, president of American Express’s Global Prepaid unit, said consumers loved the gift cards but often complained about the monthly fee that ate away at their balance. There were no monthly fees in the first year, but on the 13th month, American Express began charging $2 a month.

Mr. Chokshi said eliminating the monthly fee was now possible because the gift card business had enough scale to remain profitable without the fees. The company will continue to make money from the purchase charge, which ranges from $2.95 to $6.95, as well as from its share of transaction fees, up to 4 percent each time the card is swiped. — New York Times

That’s right. When left to their own devices, companies actually respond to what their customers want, because those customers can go elsewhere if they don’t like the company or its products. Or at least they try to. Most if not all of the economic problems we see today are a result of government stepping in the way with its big guns and preventing companies from offering customers what they want. And in the end, no matter the sales pitch your drunken sailor in Congress gives you, this is not to your benefit.

So what’s to be done with banks that screw their customers by offering unwanted “services” which turn out to be more hassle than convenience? Nothing. Their customers should be leaving if they don’t like it. There are plenty of banks that don’t engage in this practice. If they stay, they certainly are stupid, and if they get their friends with their big guns to interfere with the few people who actually want this service, then they are dangerous.

One thought on “Overdraft protection practices draw ire, legislation

  • October 23, 2009 at 7:59 pm

    I was just reading my comment from Oct. 2 above.

    You probably think I’m joking around, but you should think about it. It is very difficult for most people to actually get their hands on their wealth. What something is worth and what you will actually get from its’ sale after the banks and the governments are done with you are two different numbers.
    As far as savings, investments and pensions, they are just numbers on paper. Try to get them as cash in your hand and you run into withdrawal limits, penalties and taxes. The police can seize any briefcase full of money they find as possible proceeds of crime and you won’t get it back.
    Getting your net worth and all of your available credit out of the country in the form of untraceable liquid capital would be almost impossible.
    But like I said, my friend and I had it all pretty much figured out.

    For more information, send $29.95 to Bob at Homeland Stupidity and I’ll send you the complete do it yourself kit with easy to follow directions and a full list of possible exotic escape destinations.
    Ha! Just kidding. There really is no hope. Forget it. Forget all about it. Just keep going through the motions of being alive and someday it will all be over.

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