Usury

This is not really a new story, given that banks have been charging usurious overdraft fees for the better part of a decade now, but I suppose the climate has changed in the wake of the credit crisis, collapsing banks, and regulatory reform:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.

If you've paid one of these fees one time, you've probably paid them multiple times; according to the article, the FDIC found that ninety-three percent of fees come from a mere fourteen percent of bank customers, many of whom are low income. This makes sense of course; the less money you have in your account, the more likely you are to brush up against your account balance and get some fees sent your way. You can probably imagine why banks are so eager to charge these fees. According to the article, they rake in about $27 billion in profits a year charging fees upwards of $30 every time a bank customer overdraws their account, even for transactions of less than a dollar. Of course, banks defend this conduct as something that customers want:

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Banks are so confident that you will want this service that some-like Bank of America-won't even let you opt out of it without forcing you to squabble with customer service.

When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.

Ms. Holton-Hodson said she spent two years asking bank employees if her brother could get a card that would not allow him to spend more than he had. Though Bank of America does not typically allow customers to opt out of overdraft protection, it finally granted an exemption.

“I’ve been angered and outraged for many years,” she said. “When there is no money in his account, he shouldn’t be able to pay.”

Anne Pace, a spokeswoman for Bank of America, said the case was “complicated issue without any simple solutions,” but declined to elaborate, citing privacy concerns. She added the bank allowed customers to opt out of overdraft services on a “case-by-case basis.”

And of course, the banks fought regulation that would require them to get your permission to sign you up for these programs, or disclose what the program actually costs you (the equivalent of an annual interest rate in the thousands.)

Banks will also do you the favor of structuring your debit transactions so that the largest are taken out of your account first. This means of course that a relatively large transaction can drain your account, leaving you subject to a fee for every little transaction that follows. They defend that practice as well:

Mr. Talbott, of the Financial Services Roundtable, said some banks reordered purchases based on surveys showing that consumers want their most vital bills, like rent and car payments, which tend to be for larger amounts, paid before items like a $3 coffee.

Right. Except, as we've already established, they will generally let all of these transactions go through. So why do they need to be in any particular order at all? Unless that is, the bank makes more money by gaming the system against you.

And they warn of doom and gloom in the event of any reforms:

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.”

To which any sane person would say, if a bank can only make money by charging usurious fees in an underhanded manner, then perhaps we do not need as many banks.

What banks do is actually worse than this article makes it appear. If your account is overdrawn by even a tiny amount, you can quickly find yourself owing hundreds in overdraft fees. Now of course you can refuse to pay them...if you don't mind closing your account, cancelling your direct deposit and automatic bill pay, and then either taking your money elsewhere to open a new account or paying smaller fees to have your checks cashed by a check-cashing service, and then being harangued by debt collectors for the money you owe to the bank in fees. So your money is essentially held hostage by the bank. And unless you move to a credit union or community bank that doesn't regard their customers as prey, you will simply encounter the same treatment.

Banks don't provide this "service" to you because they don't want you to be embarrassed at the checkout lane. The institute it, whether you want it or not, because it's billions in free and easy money that most people are going to pay, whether they want to or not. They can get away with it because they've lobbied the Federal Reserve and Congress to stay away from the issue, and because consumers mostly don't have a choice but to accept such fees or hunt down the minority of banks and credit unions that don't charge them. Fortunately there are members of Congress who are taking action on this issue, though you can expect a hell of a fight from the banking industry on it (twenty-seven billion dollars is a lot of free money.)

(Also, see Fred Clark for more on this issue.)