I’m talking about like when you inadvertently overdraw your account by a minuscule amount, say a couple of dollars, and the bank penalizes you with a whopping overdraft charge of as much as $30.00, depending on where you bank. Now the bank obviously has an interest in discouraging overdrafts, but are such high fees really justified? Are they needed to cover the extra cost of collection? Or do they merely wind up in the pockets of better-off account holders and stockholders, who never overdraw their accounts? That last possibility seems patently unfair as it would transfer wealth from the financially strapped to the well heeled. Please say it ain’t so.
They go to the bank, and ultimately to stockholders (or, in a mutual bank, depositors). They wouldn’t go to other accountholders unless you argue that they pay less than the cost of servicing their accounts, and so are cross-subsidised by those who pay more.
Are the high fees justified? Depends on your definition, but many years ago, when overdraft fees were a fraction of what they are now, they were the most profitable transaction a bank could make. The fee set has nothing to do with the extra cost of collection (that’s minuscule) or the cost of manually processing a check (a very low-paid clerk takes care of that in a few minutes). Most of it is pure profit.
[complete hijack, but worth mentioning]
This happened to me recently; I went overdrawn and got a letter about it, the bank charged me £20 for the privilege and £20 more for each transaction that occurred while I was in the red (to a maximum of three charges per month).
I thought little of it until on a visit there to conduct some other business, I happened to mention it in passing (i.e. explaining sheepishly how unusual it was), they instantly refunded the charges.
It seems they do it mainly to scare you into coming in to talk to them (keeping the communication flowing).
It’s gravy, plain & simple. Sure there is some cost to the bank for processing a check that draws in NSF, but it sure as hell isn’t $30.
Then why do they charge it? Because they can.
If it were at least partially pro-rated to the overdrawn amount, it would be more fair.
Once, by prior agreement, my bank transferred money from my checking account into my savings account, just in time to bounce a charge against the checking account, and penalize me, even though I had enough money in my combined balance to cover the item. They reversed when I complained, but said it was for this time only and it was still my fault.
I believe that some banks now offer services where they will automatically juggle your accounts to prevent any one account from going overdrawn.
A local news station that does much investigative journalism investigated banks. They set up an account at many different banks and branches for $100 then wrote a $60 check, a $50 a $20 check and two $10 checks against that account. (I may not have the exact details but this was the spirit).
Every single bank processed the $60 and $50 first then hit for an overdraft $30 fee and three checks ($20 and the two $10) so the account was hit for four fees.
If it was not a policy for banks to try to screw you then some should have processed them differently resulting in less fees. However, all processed them in the order resulting in more fees.
Would you rather bounce your house payment or the check to your favorite magazine subscription.
Personally I think there may be something shady in how they go about this but I would rather bounce a $10 check outright than a $50 or $100 by a few dollars.
As a side note…watch out with your online billpay accounts. I had a deposit not become “available” due to a prior NSF (of $4 and change) and supposedly Netbank and their ilk can hold deposits for up to 10 working days if you have over x days of NSF. I neglected to note that “balance” and “available balance” were different and tried to pay bills via my bill pay account.
One might think that the billpay system would just reject the request…NOOOOO… 4 NSF charges. I call and raise hell, they reverse the charges but still refuse to release the deposit for another 2 weeks.
@#%#%^ NETBANK!!! %^#$%^
Banks make their money in two ways:
First, they take advantage of their less well-off customers who can just barely scrape through each pay period to their next pay check. These are (mostly) the people who bounce checks (or pay overdraft charges) because they frequently have emergency expenses that they need to pay for. They are (mostly) the ones who can’t keep the minimum balance in their accounts and have to pay a fee. They are (mostly) the ones who can’t pay off their credit cards each month and thus pay interest. And, of course, they have so little money in their accounts that they make very little interest.
(Note: Yes, there are some well-off people who do these things too. They have psychological problems. They need to get help).
Any reasonably well-off person can nearly always avoid bouncing checks, paying large bank fees, and paying interest on their credit cards. Banks only break even on these people. They don’t make any significant money on them.
The other thing that banks make money on is that they take the money you’ve put in your accounts and invest it in mortgages, small businesses, and (if they are a large bank) large businesses. They make somewhat more money than they pay back to their customers in interest. Any well-off person who keeps his money in a bank knows that he is making a small return on his investments and that the bank is making money on his money. It’s worth it because keeping the money in a bank is safer than any higher-interest investments. (And nearly all really well-off people do have other investments. Rich people keep only a little of their money in ordinary bank accounts.)
They don’t make any money on the true deadbeats who bounce checks or charge big amounts on their credit cards and then skip out on the charges. They do what they can to catch these people and send them to jail, but that costs money and there’s usually no way to get any money from them to repay their bills. The banks lose money on the deadbeats.
I’ve been both a person that was barely scraping by (for 11 years as a college and grad student) and a reasonably well-off person (for the past 21 years). If you’re barely scraping by, follow these rules:
Do everything you can to avoid bouncing checks (or having overdraft charges).
Put your money in an account that charges the least fees for the amount that you usually have in it.
Don’t get any credit cards. If you must get one, get one with the smallest fees, and never charge more than you can pay off on the next bill.
And, of course, live frugally. Live within your means.
In general, don’t expect banks to feel sorry for you because you’re not rich. They make their profits by taking advantage of you. If they were to re-align their fee structures so that they would place more of their costs on their well-off customers, those customers would go elsewhere (or so the banks claim).
Accounts with large balances are what allow financial institutions to lend money. They make money off the interest on the balance. Only a fraction of the interest earned gets accrued on the actual account. The interest is, of course, paid by the borrower.
My bank loves to charge people overdraft fees. And they do it several ways.
First, my bank doesn’t update the account balance that is shown on ATM receipts or online or through the automated phone system on a daily basis. They update that balance on a weekly basis. So, if I have a $100 balance in my account, and I withdraw $20, then check the balance the next day, it will show as $100, not $80. This was especially annoying in college, because I would check my balance online, think it was correct, withdraw money and then find out about the overdraft. And I was a two hour drive away from my bank’s nearest branch. After complaining many times, and showing my records (printouts of account online access, ATM receipts, etc) and getting overdraft fees refunded, they told me about the weekly account update.
The second thing that the bank does is to clear out all checks and withdrawls before clearing deposits. So, let’s say that I have $0 in my checking account and I make a $100 deposit on Monday. Within business hours. The sign at the teller window states clearly “Deposits made before 2 pm are credited the same business day and funds are available immediately for use. Deposits after 2 pm are available the next business day.” So, by that sign, my money is available for spending that Monday. So, I start spending…and by Monday at midnight, my deposit is spent. Back down to zero. It’s now the following day (Tuesday) and my bank decides to process everything on my account. First, all of the debits come out of the account. If we start from $0, subtract the $100 that I spent, my account balance is -$100. Now that means I have an overdraft. Hit me with a $30 fee. Total balance -$130. Now lets credit my original deposit of $100. And I have a balance of -$30–the overdraft fee. And since there is no timestamp on my deposit slip (only the date the deposit was made), I can’t prove that I actually made the deposit when I say that I did, so I have to pay the overdraft fee.
Examples were oversimplifed because I suck at math, but it’s still a sneaky practice and I don’t like it. And the other banks where I live do the same things. Evil. EEEEEVIL!
javaman writes:
> That last possibility seems patently unfair as it would transfer
> wealth from the financially strapped to the well heeled.
Fair? . . . Fair? . . . Of course it isn’t fair. This is capitalism in action. It’s set up to soak the poor, who don’t have the pull that the rich do. If you want to fix the system, try to get some laws passed that compell the banks to charge reasonable interest rates and fees on their accounts. Just watch the banks give big contributions to legislators to influence them to vote against any such laws.
If you live in New York State, there is such a law. Banks here are required to offer what’s called a “lifeline” account. Most banks don’t like to talk about them much because they’re either money-losers or money-barely-makers, but IIRC they require only a $300 minimum balance and offer a few (eight?) free checks a month. When I was a grad student I had one of those. Other states may have equivalent laws, so it’s worth looking around the Net or asking. I can promise you it’s damn unlikely a bank will volunteer the information.
Another option: if you’re working, find out what bank your employer uses. That bank may offer you better accounts than you could otherwise afford (this is now the case for me).
Finally, you may qualify for a credit union, especially if you work for a government employer or in a unionized field. My understanding is that credit unions offer very good deals for small accountholders, so ask around at work.
Another reason for the charge is bound to be that the bank is providing a disincentive to go overdrawn. If there were no penalty, millions of people would do it every month. That’s tens of millions of dollars in overdrafts the bank would have to float.
It’s like a library book fine: There’s no way, say, a $20 / hr librarian can make money for the library by: 1) Checking to see if books are late, 2) Reminding a customer if they are, 3) Collecting a fee, 4) Giving a receipt. All for 40 cents? They’re earning 33 cents a minute.
The main reason libraries give fines is to encourage people to bring books back.
You can get into serious trouble too, even if you obey all the rules, due to “unexpected delays” in processing - even if it’s entirely the bank’s fault!
A while ago, I deposited $55,000 on a Friday, in the form of a bank cashier’s check drawn on my own bank (Bank of Amerika), which I was going to write a personal check for the next week. They said it should have been posted in “24 hours” when I deposited it.
Come Monday (3 days later), I was supposed to write the check out, but due to an unrelated delay, I didn’t have to write the check for another week. That day, I went to the ATM to withdraw some money, and noticed that my account seemed short about, oh, I don’t know…$55,000?
So I called.
Even though I deposited a cashiers check drawn from that very bank, on Friday morning, it somehow was “not processed” by the end of the day, Monday. They then told me that the “next business day” was actually 2 complete days from your deposit. As it was, it took until Wednesday morning until it cleared - due to a “processing delay”. :rolleyes:
Any idea how much trouble you get into with a $55,000 overdraft? Think they would have refunded it to me?
Yes, banks do maximize their profits by stacking the deck against their customers.
What you are discussing are DDA’s (Demand Deposit Accounts - aka checking accounts). Most banks have their programs do the following:
-
sort items by account number (duh!)
-
sort each account’s items by type
-
sort eact account/type by amount
-
post in the following order:
a) debits (largest first)
b) fees
c) credits
the idea is to get the balance as low as possible (remember: monthly fee if your balance EVER falls below $X.XX).
So yes, if you have a beginning balance of $100.00, write checks for $10, $20, $50, and $60, and deposit $1,000 on the same day:
Bal: 100.00
db: 60.00
bal: 40.00
db: 50.00
bal: 10.00-
db: 20.00
bal: 30.00-
db: 10.00
bal: 40.00-
fees: (3 NSF @ 30.00 ea + 1 min. balance ding @ 9.00)
99.00
bal: 139.00-
cr: 1000.00
ending balance: 861.00
then there is the matter of “ledger balance” vs. “available balance” (banks absolutely LOVE ‘float’, and will play it for all they can)