NYT: banks quietly gorging on debit card overdraft fees. (Now THAT'S how to cover the bank beat!)

This is the best article on consumer banking I've seen this year. Authors Lieber and Martin are to be congratulated. More pieces like this will help impede the banking industry's "regulatory capture" that has has rightly disgusted so many of us. I follow this industry pretty closely, and I learned several things from the article. Among other items, this piece includes the following:

1. Debit card OD fees alone now earn banks more than ALL penalty fees from ALL credit card users (WOW).
2. Banks increasingly WILL NOT ALLOW debit card users to turn off OD protection, declining purchases instead.
3. "45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits", and thus
4. Ending them could cause "an estimated 1,000 banks and 2,000 credit unions to fold within two years", says one industry economist.
5. The banks' argument that they logistically cannot curb these tactics is roundly disproved by the few who don't.
6. Bank lobbying has kept regulators from requiring disclosure of OD protection as loans, despite its soaring costs.

Some really unforgettable stories too. My favorite is the sister who couldn't get BofA to turn off OD protection to her mentally impaired brother's bank account despite trying for two years. Why? Because, said a BofA spokeswoman, the case was, uh, "complicated." Yeah, right.

Nice to see the mainstream media actually covering the banks critically yet fairly for a change. Refreshing. More please!

(Full disclosure: Ron Lieber is a friend and sometimes colleague of mine. I knew nothing about this piece before reading it just now, and he has no idea I'm touting it.)

Personally, nobody should be using a debit card. I don't see any advantage - you don't get the interest free float, you don't get the same consumer protection as a credit card, and you have to potentially pay the OD fees.

Best - use multiple credit cards with the best rewards and have the FULL monthly payment be automatically be paid from a brokerage margin account [I am not advocating using margin]. The advantage is that even if your FULL payment happens to exceed your current balance, you still don't pay an overdraft fee - you temporarily pay interest at margin rates which are much-much lower than bank credit card rates. When you discover the shortfall, you transfer some money from a bank account to the brokerage. So worst case scenario, you end up paying 8ish% for 5-7 days - very small amount compared to the OD fee. [I do exactly that - I have all my payments - mortgage, multiple credit cards, HOA fees etc. directly being withdrawn from my brokerage account. I have paid $3 to $4 of interest at most a year - but no overdraft fee ever. The only reason I have the few overdrawn cases is that the brokerage accounts have stopped paying interest - so better to keep money at Ally Bank or something like that and sometimes I get too busy to take care of active balance in a timely manner].

CASH, dont leave home without it...

have enough cash in your bank acct and there's no way an OD will occur.
stop buying sh*t w. money u do not possess

Dave your takeaway points #1-4 are the real meat of the article, I found those interesting that so much income is derived from these fees....but the article did nothing to highlight the real problem... people spending money they dont have and/or using a poor financial tool to do so! To me, beyond the tidbits of note you listed, all that article does is show how stupid most Americans are.

The "sob stories" are laughable...I love how the girl in the video with her BMWz3 convertible in SF, carrying a designer purse worth more than my entire outfit, doesnt have enough in the bank to cover a slice of pizza or tank of gas. Pathetic. "Gee, maybe if you kept the $500 in the bank instead of on your feet and in your hand, you wouldnt be bouncing purchases Ms. Diva".

The article highlights the issue, but doesnt offer any practical solutions for those who cant balance their checkbook or be bothered with learning about available balances and hold times, or those with legitimate needs such as the disabled family member... A debit card is NOT the proper product for these people! He might have wanted to give consumers helpful info on how to avoid this entirely, such using prepaid cards with NO OD capability. Or, for those who have basic levels of fiscal responsibility, my 2003 topic

Debit Card vs. Credit Card use - Why you should NOT use a debit card for purchases!

Corndogg said: There is no hope for some. Another reason why I enjoy using credit cards for purchase protection and rebates. However, if you can't keep enough cash in your bank account then you shouldn't be using debit or credit cards. For those who can't find a means to pay 0% interest is it better to pay 30% interst or $35 in fees per transaction? Seriously.

fixed that for ya.

Those people need to use prepaid cards that will not allow OD.

Do you mean to tell me that banks are following the terms and rules associated with banking products that consumers agree to when they sign up for such products? Oh, the humanity! We must do something to stop this travesty of justice.

What will these evil, despicable banks think of next?

biomedeng said: What was it like 20 years ago before debit cards existed? Did these types of people who overdraft their debit card just bounce checks left and right? Or were people more responsible back then?

No, people were not more responsible. This is an interesting point, though -- writing a hot check is a crime. The bank assesses very high fees for hot checks, and the check recipient can turn the check over to the local authorities, who will issue an arrest warrant for you if you cannot immediately cover it.

ThePessimist said:
Many people get caught on debit cards because they make a deposit, and then make purchases while there is still a hold on their funds. With checks, if you made a deposit and then wrote checks the same day, there was a good chance your deposit would clear before your checks did.

In my experience (at least the places I've banked) deposits will prevent you from getting OD fees, even if there is a hold on them. Perhaps that varies from bank to bank.

There have always been stupid lazy people, and they have historically been taken advatage of by scam artists. What I find most disturbing is point #3 and #4 of OPs post. It used to be that Banks made money from the investment in the most productive and responsible members of society by issuing personal and business loans that resulted in the economic growth of a community. Now Banks skim profits off the mistakes of the lower income and less productive. Doesn't that say something about the ethics of the banking industry as a whole and the sustainability of their business strategy?

I don't think it is like writing a bad check for one main reason. If a consumer was to turn off OD protection now, when they went to purchase something as debit (not credit), the card would be denied on-the-spot when it goes for electronic approval because you do not have the funds available. Writing a check back-in-the-day (something I haven't done because I'm 23), was in good faith, so a merchant wouldn't know if you had available funds or not until it either cleared or bounced when they went to cash it (unlike the e-check they can do today that verifies it on the spot).

GoogledToDeath said: There have always been stupid lazy people, and they have historically been taken advatage of by scam artists. What I find most disturbing is point #3 and #4 of OPs post. It used to be that Banks made money from the investment in the most productive and responsible members of society by issuing personal and business loans that resulted in the economic growth of a community. Now Banks skim profits off the mistakes of the lower income and less productive. Doesn't that say something about the ethics of the banking industry as a whole and the sustainability of their business strategy?
I won't wade in to the ethical argument, but I do agree that loans encourage economic growth for both parties, whereas overdraft fees only provide growth to the banks.

Glitch99 said: McDonalds is a burger joint, but quietly gorges on the obscene margins of fountain drink sales for the bulk of their profits. Should they get raked over the coals as well?

Decent analogy but there is a difference. It's more like if Mcdonalds charged a $35 fee every time you forgot to throw your garbage away - something tangential to their actual business of providing food.

I'm pretty neutral, anyone can avoid these problems by keeping an eye on their finances (I seem to pay a fee or two a year due to absent mindedness). But if the government wanted to do something to discourage (not outlaw) these fees I'd support it

If it's either OD fees or goodbye no fee checking, then keep the OD fees.

magika said: Do you mean to tell me that banks are following the terms and rules associated with banking products that consumers agree to when they sign up for such products? Oh, the humanity! We must do something to stop this travesty of justice.

What will these evil, despicable banks think of next?

Your sarcasm rests on the premises that (i) a consumer fully understands (or should understand) all of the statements buried in the numerous written documents containing legalese that a bank asks a consumer to agree to; and (ii) that even if a consumer understands all of those statements, if it choose to proceed to do business with the bank (even if the consumer feels compelled to do so due to the unfair level of bargaining power held by the banks). I find both premises flawed for a variety of reason (which I won't get into them, as most are fairly intuitive and obvious).

Basically, you're sarcasm mocks the idea of "contracts of adhesion", which is a legal principle generally accepted and recognized by the legal system of our nation and most other industrialized nations.

dudediggie said:
Your sarcasm rests on the premises that (i) a consumer fully understands (or should understand) all of the statements buried in the numerous written documents containing legalese that a bank asks a consumer to agree to; and (ii) that even if a consumer understands all of those statements, if it choose to proceed to do business with the bank (even if the consumer feels compelled to do so due to the unfair level of bargaining power held by the banks). I find both premises flawed for a variety of reason (which I won't get into them, as most are fairly intuitive and obvious).

Your smug self-righteousness rests on the presmises that (i) consumers are incapable/too stupid to know that they should not sign up for banking products that they do not understand and (ii) that there exists no competition or alternative banking methods for those who refuse to read/understand/agree to the banking products they sign up for. I find both premises flawed for a variety of reasons (which I won't get into, since they are obvious).

dudediggie said:
Basically, you're sarcasm mocks the idea of "contracts of adhesion", which is a legal principle generally accepted and recognized by the legal system of our nation and most other industrialized nations.

Did you bother to look up the definition of "contracts of adhesion" before using the term? Given what the term actually means, your comment is hilarious.

Chrisk327 said: I'm sure no one here has ever overdrawn their account by accident but to normal humans it does happen. the problem in my opinion is the size of the fee, and the fact that consumers can't opt out, and even if they could, the manor in which it would be disclosed/sold to the consumer.

if banks allowed opt out, they would tell the consumer how great it is not to have the worry of being declined etc etc and the fee structure would be buried.

I find it laughable that everyone here expects the world to understand the financial system or even the basics of the fee structures used by banks and credit card companies. I'm sure someone will chime in that idiots shouldn't sign up for things they don't understand..... I feel that there is some responsability to set up things in a fair way with a fee structure in line with the service provided as well as adequate understandable disclosure.

I have ODed my account on occasion, I signed up for OD protection from my bank, I don't get charged a fee, I pay interest on the balance at a high rate. Happens to me maybe once every two months, I don't like to keep much in my checking and one of our paychecks is an actual paper check that clears in a an awful amount of time. Recurring automatic payments don't wait for any man. System works well for me, I transfer money to cover the short fall when I notice it, at most i've paid less than $5 in interest in the past year. If i didn't have it, I would adjust my balance, but point is, I signed up for it, I pay for the service in the form of a pecentage of the balance for the time outstanding and my coffee didn't cost $37.

Also, for those who are plenty credit worthy a debit card doesn't make as much sense. For some students, lower income households and people with bad credit, a debit card works very well for being able to live their life without carrying a stack of cash around with them.

It happenned to me accidentally and I couldn't believe the fees. I use my debit card for coffee and lunch at work and only have a debit with them b/c it's convenient to deposit money with them and transfer to online banks, or vice versa.

I had a recurring HOA online bill payment [tied to the checking account with the debit card] I forgot to turn off which is due annually. Lo and behold, when I went to check my balance they'd charged me $45 x 3 attempts to clear the HOA bill payment, plus $45 for 3 coffee transactions that week. Holy christ.

My fault for not being more careful, but I couldn't believe the excess. They didn't even email alert me of the initial overdraft. They could've called. But they wanted those fees.

They ended up crediting back 3 of them, and I will never make that mistake again, but it's ridiculous.

I think you make a good point about how the facts are stated. However, of a $35 or $45 overdraft fee, how much do you think it costs a bank? Maybe $1.00 but probably less. If they aren't informing you besides on your monthly statement, then what are the costs besides programming their computers to allow overdrafts and assessing the charges?

magika said: Do you mean to tell me that banks are following the terms and rules associated with banking products that consumers agree to when they sign up for such products? Oh, the humanity! We must do something to stop this travesty of justice.

What will these evil, despicable banks think of next?

The fact that people signed a multipage disclosure does not mean that the banks acted morally. In a true market economy, people trade because what they are receiving is of more value to them than what they are giving. If you buy a $10 meal from a restaurant, the restaurant values your $10 more than it values the food it serves you, and you value the food it serves you more than the $10 you gave them. Do people who pay $34 overdraft fees for $1.75 purchases really "agree" to this? Do they really value not being declined at the cash register for a small purchase more than the $34 they are later asked to pay? The fact is, the banks operate as an oligopoly, and there is very little real competition. This isn't a case where you have hundreds of sandwich shops all competing with your business. It's more akin to having 7 major airlines who all charge ridiculous fees for things like checked baggage and itinerary changes.

Glitch99 said: McDonalds is a burger joint, but quietly gorges on the obscene margins of fountain drink sales for the bulk of their profits. Should they get raked over the coals as well?

Even if they turn off the auto-overdraft feature, couldnt a NSF fee (charged to your account when a check bounces) legitimately be applied anyways? Couldnt banks instead treat a debit card overdraft the same as writing a bad check, which would be a crime? In that case, I'd say letting it slide with only a overdraft fee is a much better option.

Why are the banks so maligned over this, when it's the consumer's own actions that keeps incurring the fees? Dont like the fee? Move to another bank (or simply stop overdrawing your account). I'm sick of everyone expecting the world to adapt around their individual needs and wants, instead of adapting their habits to the established norms.

How many banks allow you to turn off overdraft "protection?" Last time I was in McDonalds, no one forced me to buy a fountain drink. Indeed, I did not! I bought a burger, chicken nuggets, fries, and asked for a cup of water. Also, I chose to eat at McDonalds. If McDonalds was the only player in the market, your analogy might have more merit.

Bump for new developments. Has anyone seen anything interesting on this of late? I haven't had much chance to follow the details in recent weeks...

aeiouy said: ElJayL said:
Why should the banks alert the customer at the POS that they don't have enough money? Because they can and it would allow their customers to make an informed decision. It doesn't matter if the person could check this or know it. The fact is the bank knows with absolute certainty at the time of that transaction if it is going to be covered or not.EC and others above have detailed cases where the bank might not know this with "certainty". But this doesn't undercut your main argument. There are many circumstances in which a bank would know, but even a prudently acting customer would not (an unauthorized ACH draft, double authorization by a careless merchant, a normally working ACH deposit that gets flubbed for whatever reason, etc. etc. Since they won't do it on their own because they are hoping to trip people up to make money, they are going to be forced into doing it.Bingo.