Your debit cards can cost you more

The rise of debit cards and what makes it controversial

The rise of debit cards and what makes it controversial

More than what you’ve probably spent.

The NYT has an astounding article today about the costs of overspending and how banks profit from them.  Through overdraft fees, the amount charged to a person who spends beyond the amount left in his debit card, many banks have been earning more from them than through regular profits or the penalty fees charged from late credit card or utilities payment.  There were a few things that I found stunning. But here’s a brief example:

[Peter Means] 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.

And here’s how the overdraft fee works for the banks (and apparently not for the consumers):

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.

I think the intention is admirable and I agree consumers do have to be responsible with their own finances but what is happening isn’t really justifiable.

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.

Does anyone else see something wrong from the idea that many banks survive because of overdraft fees? Banks exist to be a source of financing for people, not to be a consumer of people’s finances.  The fact that these banks rely mainly on overdraft fees to continue existing highlights the fact that there is something completely wrong with the current system and perhaps more importantly, the laws on consumer protection.

Banks may also have to answer a question that many consumers ask and that Ms. Maloney has raised in her proposal: Why can’t banks simply alert a consumer at the cash register if they are about to spend more than they have in their account, and allow them to say right then and there whether they want to pay a fee to continue?

The banking industry says that simply is not possible without new equipment and software, costs that would be borne by consumers.

Maybe there is not an infrastructure for banks to implement such a policy, but it doesn’t make it right that consumers are allowed to suffer (whether it is their mistake or not) and banks, to profit from that problem.

[W]hen a consumer does overdraw an account, banks have found a way to multiply the fees they collect by rearranging the sequence of transactions, critics say.

Ralph Tornes, who lives in Florida, is pursuing a lawsuit against Bank of America for charging him nearly $500 in overdraft fees in 2008 after it rearranged his purchases from largest to smallest. In May 2008, for instance, Mr. Tornes had $195 in his account when he made two debit purchases for $8 and $13; the bank also processed a bill payment of $256.

He claims that Bank of America took his purchases out of chronological order and ran the biggest one through first. So instead of paying $35 for one overdraft fee, he was stuck with three, for a total of $105.

I am all for consumer responsibility and under the belief that banking, like many others, is a decent and honorable job.  But it is one thing that consumers are made responsible for their mistakes and irresponsibility and another to take advantage of it.

And oh, remember the consumer protection role that was to be given to Fed?

“No regulator has made any of their bank examiners adhere to best practices,” said Mr. Halperin, of the Center for Responsible Lending. “The result is over that time period consumers have paid probably upwards of $80 billion in overdraft fees while the Federal Reserve considers and considers and considers whether or not they are going to do anything.”

Officials at the Federal Reserve dispute that they have not taken sufficient action on overdraft fees, noting that they imposed tougher disclosure requirements in 2004 and are now considering additional regulations to address abusive practices. They will disclose their intent before the end of the year.

Maybe Ben should stick to what he does best.

Source: NYT

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