Overdraft protection -- what happened prior to this practice?

Factual Questions
1

Not sure where to put this –

I got dinged on my savings account for a $29 overdraft fee. Couple mistakes on my part – signing up for Angies List (1), paying for said product with Paypal (2). Forgot that it was going to be a recurring charge, AL hits my Paypal goes to my bank instead of the CC on file (I have much commentary on Paypal’s insistence on trying to use my bank account for things, but I’ll save it). My bank is nice enough to cover the $7.50 for me so the charge goes through, then charges me $29 for the privilege.
Now, this is a savings account mind you, I’m not writing checks from here. And I understand the benefit of overdraft protection if the alternative were some necessary bill not getting paid, but in this case I would have loved for my bank to have given Angie’s List the finger. But I’m relatively young and I can’t remember ever having a bank account that didn’t have overdraft protection. I may have had a savings account without it, but it never came up. Apparently even savings accounts automatically give it to you.
So the questions – was there a time when the bank would just say “Sorry, no money here, go away”? And does this still happen? Would AL be able to come at me through a collection agency, or would they just cancel my account for non-payment? In other words, if I sign up for a service with a recurring charge but don’t give the service provider any method for getting my money, am I still obligated to pay?

(FTR, I cancelled the AL account immediately and paid all parties, I’m just curious).

2

It’s called bouncing a check.

I’ve had a couple of places I worked for bounce check on me. This was a major nightmare when I was poor. I got paid, and put the check in the bank, never thinking a payroll check would bounce and wrote checks against it. Not only did my payroll check bounce, the three checks I wrote against that amount bounced and I had to pay fees to the bank and fees to the companies I bounced checks to.

After that I learned to wait till the check clears.

3

Ah yes, people used to use checks.

OK, so I understand a bounced check fee – sort of. The bank has to process all of that paperwork and whatnot, and it costs them some amount of time. Did they use the same rationale when rejecting wire transfers or whatever people did for electronic transactions prior to the internets?

4

wire transfers are initiated by the person with money in the bank. there’s no wire transfer to “bounce” if you don’t have the money in your account when you tell your bank to send the money.

checks are different. they are not transmissions/transfers of money - they are legal pieces of paper which allow the holder of the check to demand that your bank pay out money from your account.

5

Ah, I see. So this situation is really just unique to e-checks. Or maybe it’s not unique and I’m just stuck on the fact that I could potentially pay a bounced check fee for a check that I didn’t write. It’s all so strange to me.

6

It’s called “insufficient funds”, the party you wrote the bounced check to will likely charge you a fee as well.

7

Here’s the principle. You have an account, say a checking account. You also happen to have a savings account. The checking account is supposed to be for handling your financial transactions daily etc. The savings account is supposed to be for longer term money storage.

You write a check to someone. That check is a declaration that you will pay them when they turn it in to a bank. They turn the check in to a bank, the bank processes the check by requesting your bank pay the money per the check. Except you are suffering a temporary shortage of funds, and your checking account is temporarily empty.

What happens? Well, the nominal response was your bank tells the other bank “Hey, we checked the account you cited and there’s no money there, we can’t give you any.” That bank then has to tell the guy you gave the check to “Sorry, that check bounced, you don’t get any money.”

Now, because you didn’t have money, your bank is going to charge you a fee for their effort, possibly because they will get hit by a fee from the bank they couldn’t send money to. (That last is guesswork on my part.)

Okay, so somebody has a bright idea - Hey, I have a savings account with you, too, why not just take money from that? So they invent “Overdraft Protection”, which basically means they will take money from your savings account and transfer it to your checking account to cover the expense that you were unable to properly plan for. They’ll cover your ass.

But here’s the kicker: the money in the savings account is being used by the bank to invest. That’s the point of the savings account - to keep the amount of money stable so they can invest it. By taking money from that account, they are impacting their investing in other things (like lending money to some schmuck who wants to buy a house). So because they have to deal with that hassle, they are going to charge you a fee for the privilege of covering your check.

So instead of bouncing a check, paying a bounced check fee, and then dealing with the hassle of repaying the person you owe and sorting out all the bad will/bad credit issues that caused, they are going to save you that hassle by paying for the check, but then charge you for the service to cover their hassles due to the investing side.

I remember when overdraft protection came out, and my dad’s bank did it free of charge. My dad, being the perceptive guy he was, kept zero dollars in the checking account and all of his balance in the savings account. That way, it was earning interest. Eventually the bank informed him they would start charging for overdraft protection. I’m sure that my dad wasn’t the only one doing it, and that’s why the banks decided they had to charge a fee. Every once in a while it might not be a big deal, a cost they could eat, but when people do it daily, that adds up.

Of course now there are such things as interest bearing checking accounts, too.

8

Interesting background, Irishman. By the time I got into banking, overdraft protection went to a credit card. (In fact, one of my first credit lines was a $500 limit card that my bank opened for free to give my checking account overdraft protection. I left that card in the envelope until I closed the account.)

In this case, the overdraft protection appears to just be a straight loan. 386% interest, but a loan nonetheless.

After I wrote this I realized I was thinking of this transaction like a debit card, rather than the e-check that it is.

9

Debit transactions are not that different from an e-check. Depending on the account and bank, the debit may either be covered by overdraft, or the bank can refuse to pay it.

Back when I used WaMu, they even used overdraft for an ATM cash withdrawal. Due to timing differences in the recognition of a deposit, they said that a $40 ATM withdrawal put the account negative. I would have assumed that they would refuse to give us the cash, but I think they were very happy to front us the $40 so they could also charge $32 in overdraft.

So overdraft can really apply to any external/third-party request for money from your account. (Which is different from wire transfers, cashiers checks and money orders, but those are all initiated by the account holder and their own bank.)

10

Banker-speak for “insufficient funds” is “NSF,” which makes a handy mnemonic if you have trouble keeping these three countries straight in your head, like I used to.

11

Banks used to simply refuse payment on the check (bounce!) and charge you a fee.

Nowadays they pay the check, put any overages into a fairly consumer-unfriendly credit line and still charge a fee.

Yep, the consumer hasn’t won a damn thing. I do get off slightly better these days with my bank (USBank) because the fee is a little less, but it still pisses me off.

I can have $1000 in my savings account and overdraw my checking account by $0.02. Yep, they will still ding me for the overage (flat fee), and then put not what I need to cover the check in the credit line but a minimum $200.

I’ve yelled at CSRs about this - “just take the money needed from my savings account, you fucks! I don’t need $200 applied to credit because I was short $0.02 on my checking account!”

At least they’re honest with me. Most of them I’ve been able to get to admit that if they did that they wouldn’t make any money.

12

Back when I got married, my wife had a check guarantee card. The bank had to pay any check cleared through the card even if the account was empty. I don’t remember what the qualifications were required to get the card, though. And my wife was not rolling in money.

13

Not really a bounced check fee , and it currently doesn’t only apply to checks. One of the banking reforms is that banks will no longer be able to cover a lot of checking account/debit card overdrafts unless you opt in. They will still be able to cover recurring charges with overdraft protection, but you won’tl end up with the $29 cup of coffee because a debit purchase was approved when there were insufficient funds.

14

steronz said:

Now that’s an interesting development. Why pull from your savings account (money you own) and then hit their own lending, when they can instead extend you credit for the balance? Then hit you with a fee for the privilege. :smack:

15

Not sure if this is a national thing or not, but starting in August, my bank in Louisiana will no longer charge for covering overdrafts of $5.00 or less.