The most profitable source of income for banks? Overdraft fees • Hacker News Board

Re: The most profitable source of income for banks? Overdraft fees

#71

Post by meric » Tue, Aug 25, 2015, 1:30 AM UTC

zacwest wrote: post #50

worldadventurer wrote: post #46

Bank of America had some pretty bad practices where they would reorder the sequence of debit transactions, largest amounts first, to maximize the number of overdraft transactions: "the bank mixed up the order and delayed the timing of debits and transactions to maximize the possibility customers will overdraft accounts". They got sued and settled for $410 Million in 2011: http://www.bloomberg.com/news/articles/2011-0…

Their argument for doing is compelling. They figure larger purchases like rent or car payments should go through above smaller ones. It feels like the person doing the reordering was a different person from the one setting charges.

That's a ridiculous argument by the bank.

1. A person has many payments to make, some very large ones, but also some very small ones - and yet the variance in utility of making many of the payments is a lot smaller than the variance in the size of the payments to be made.

2. The utility of a creditor in receiving the majority of their payments is a lot higher than the utility of a creditor in receiving none of their payments.

A person requires BOTH shelter and food.

This month, your payments are:

    1. The food payment is $20.
    2. The rental payment $1000.

Let's say you have only $1000 for the month, and overdraft is turned off.

If the rental payment goes through, you have zero dollars remaining for food, leaving you hungry for the month, and will starve to death without assistance.

If the food payment goes through, you have $980 left. Send the $980 to the landlord and apologise and promise $20 will be sent the next month. Your landlord won't kick you out.

Ergo, largest payments should not go through above smaller ones, if we want to order in a way for the customer's benefit.

Therefore, taking into account of both parties, utility is maximised when a couple of percent of a large payment is skipped rather than when the entire amount of a small payment is skipped.

From the point of the view of the bank where they are usually the ones receiving the largest payments in mortgages and car loans, they will require a lot more customer support staff if there are lots of instances where people pay only 98% of their payments, because that's not a good reason to foreclose on somebody and at the same time they don't want them to continue skipping 1-2% of their payments.

What the bank is saying: Largest payments should go through above smaller ones, for the benefit of the bank!

Re: The most profitable source of income for banks? Overdraft fees

#72

Post by colanderman » Tue, Aug 25, 2015, 1:31 AM UTC

oasisbob wrote: post #64

some-guy wrote: post #12

About five years ago I worked at Wells Fargo as a teller while in college. During that time Congress passed a law prohibiting debit transactions from going through if there weren't enough funds in the account. Shortly after that we were told to start telling our customers about a new service called Debit Card Overdraft Service which was marketed as a "convenience" for customers when they were in a bind. When I asked…

I was working at a credit union during the same time, and I found the immediate change in rhetoric really disheartening. Overnight the line for overdrafting your account went from, "You're being financially irresponsible by not properly balancing your account - you deserve the fee" to "Overdraft Protection is like an umbrella - nobody expects it to rain, but if it does it's nice to have protection. I was shocked at h…

I'm surprised and somewhat disheartened to here that there are credit unions which follow this practice. Doesn't seem to really fit with their charter.

Re: The most profitable source of income for banks? Overdraft fees

#73

Post by Touche » Tue, Aug 25, 2015, 1:31 AM UTC

pyre wrote: post #67

Touche wrote: post #20

Earlier quoted context omitted.

> They know exactly what they're doing. They're rich bankers robbing poor people. I can understand thinking that the "correct" thing to do here is to simply not allow a transaction when there aren't sufficient funds, but this language goes overboard. It's not robbing a person because they were unable to keep track of how much money they own and adjust accordingly.

Large banks will do things like structure charges so as to extract the maximum amount of overdraft charges. For example: You have $40 in your account. You spend $20, then $12, then $5, then $120. One would logically conclude that at the end of the day, the bank will resolve these *in order* and you will have a single overdraft fee. Large banks *cough* Bank of America *cough* will explicitly structure those charges to…

> Do you not see anything morally and ethically wrong with this?

That's not the language the person I was responding to used.

Re: The most profitable source of income for banks? Overdraft fees

#74

Post by jellicle » Tue, Aug 25, 2015, 1:31 AM UTC

karamazov wrote: post #45

Touche wrote: post #20

Earlier quoted context omitted.

> They know exactly what they're doing. They're rich bankers robbing poor people. I can understand thinking that the "correct" thing to do here is to simply not allow a transaction when there aren't sufficient funds, but this language goes overboard. It's not robbing a person because they were unable to keep track of how much money they own and adjust accordingly.

Banks make keeping track of the money in your account intentionally difficult. You can't just check your balance and assume that you can spend what's there. Instead, your balance includes only processed transactions, whereas your account also has a list of pending transactions that can hit your balance at any time. Pending transactions can also disappear from your account, only to come back as a confirmed transaction…

> e.g: if you have $10 in your account, and you make a $3 purchase, a $4 purchase, and a $12 purchase, they'll run the charges in the order of $12, $4, and $3, hitting you with three fees instead of one.

Even better, if you have $10 and also a $500 paycheck hitting your account that night, which is to say that the bank KNOWS there is no overdraft and that you have the money in the account, they'll process them in this order: -$12 (fee), -$4 (fee), -$3 (fee), +$500 (most eaten by the fees).

And some programmer programmed that for them. Intentionally.

Re: The most profitable source of income for banks? Overdraft fees

#75

Post by geofft » Tue, Aug 25, 2015, 1:32 AM UTC

Touche wrote: post #15

stevewepay wrote: post #9

This is a quote from Michael Lewis' The Big Short, I'll never forget it: Obsessing over Household [Finance Corporation], he attended a lunch organized by a big Wall Street firm. The guest speaker was Herb Sandler, the CEO of a giant savings and loan called Golden West Financial Corporation. “Someone asked him if he believed in the free checking model,” recalls Eisman. “And he said, ‘Turn off your tape recorders.’ Eve…

> form of fines for overdrawing their checking accounts. Why in the world shouldn't you be fined for overdrawing your checking account? A checking account is not a loan, am I wrong in thinking this quote is B.S.?

What is the purpose of a fine? Before we discuss further why one shouldn't be fined, can we make sure we agree on why one should?

Off the top of my head, I see "dissuading behavior that negatively impacts the bank", and that doesn't seem to justify a fine in this case, but maybe you're thinking of a rationale for a fine that I and maybe others are not thinking of.

Re: The most profitable source of income for banks? Overdraft fees

#76

Post by raz32dust » Tue, Aug 25, 2015, 1:32 AM UTC

Wow, this is truly ridiculous. I recently moved to the US (yet to set up a bank account here) and did not know about this. Back in India, if you don't have funds, your transaction is declined. Plain and simple. And no fee for that, either. This is pure unleashed greed. Now I know why bankers are so hated out here. Banks have way too much power, way more than the benefit they provide. This whole system needs to change. Horrible!

And I am sure we are going to find this kind of shit in India soon, because from what I see, we are blindly copying the American way over there. The good, the bad, everything.

Re: The most profitable source of income for banks? Overdraft fees

#77

Post by silveira » Tue, Aug 25, 2015, 1:34 AM UTC

mikekchar wrote: post #41

staunch wrote: post #6

The pain overdraft fees cause poor people is truly hard to comprehend unless you've been there. It's incredibly evil. You've got $16 left for food and then then the Flickr account you forgot to cancel gets charged to your account, putting your balance at -$9. Now you have to pay $35/day until you get enough money to cover the overdraft fees. You end up paying $100+ for a $9 forced loan. The bank could have just decli…

There are a couple of times in my life when I was quite poor (for someone living in a G8 country...) The biggest thing I learned was to use cash. Cash is awesome because you can see how much you have and you can't spend more than you have. Even now that I am relatively well off, I have my habitual routine of getting cash at the beginning of the week and spending only that for the week. In fact, I make sure that there…

Civil forfeiture laws in the US. I don't feel safe carrying a reasonable amount of cash. Here the police can just rob me, and now I'm guilty until proven innocent.

In DC it costs up to $2500 for the right to challenge a police seizure in court, it's complex, expensive and it can take years.

Re: The most profitable source of income for banks? Overdraft fees

#78

Post by rev_bird » Tue, Aug 25, 2015, 1:34 AM UTC

fredkbloggs wrote: post #30

boling11 wrote: post #18

Bank overdraft and NSF fees are definitely odious. It's part of the reason why so many poor people have switched over to prepaid and are opting to pay the $5-$10 monthly fee for those accounts - it comes out to less for many people and at least it's predictable. These types of fees have been especially egregious in recent years, because the bigger banks have had their traditional revenue sources drastically capped/re…

> These types of fees have been especially egregious in recent years, because the bigger banks have had their traditional revenue sources drastically capped/reduced (interchange & interest spread). Maybe the lesson is that over-regulation and financial repression aren't so good for the people. These guys are going to make money somehow. You can create a system that allows them to do so with minimal harm while providi…

This seems like a politically motivated conclusion -- I just can't find any evidence that it's necessarily true.

I really can't see how "over-regulation" is the cause of banks behaving badly -- their core business is ostensibly to charge interest, right? That's still legal and, in the US at least, loans (for school, homes, etc.) are an almost celebrated social rite of passage.

I just can't look at banks knowingly screwing their customers and react with "they need less rules." If anything, this behavior is evidence that banks cannot be trusted to act in the public interest, if only because there are much more substantial financial incentives to act like assholes. Regulation is in place because it's absurd to just say, "oh, they'll be nice, why would anyone be mean to people in exchange for huge sums of money?" It fills in the moral gaps that the market doesn't enforce.

Re: The most profitable source of income for banks? Overdraft fees

#79

Post by knowaveragejoe » Tue, Aug 25, 2015, 1:34 AM UTC

karamazov wrote: post #45

Touche wrote: post #20

Earlier quoted context omitted.

> They know exactly what they're doing. They're rich bankers robbing poor people. I can understand thinking that the "correct" thing to do here is to simply not allow a transaction when there aren't sufficient funds, but this language goes overboard. It's not robbing a person because they were unable to keep track of how much money they own and adjust accordingly.

Banks make keeping track of the money in your account intentionally difficult. You can't just check your balance and assume that you can spend what's there. Instead, your balance includes only processed transactions, whereas your account also has a list of pending transactions that can hit your balance at any time. Pending transactions can also disappear from your account, only to come back as a confirmed transaction…

> Banks do more than this to make overdrafts difficult to deal with. For example, Bank of America intentionally processes your transactions from largest to smallest, ensuring you'll git hit with the maximum number of overdraft fees. e.g: if you have $10 in your account, and you make a $3 purchase, a $4 purchase, and a $12 purchase, they'll run the charges in the order of $12, $4, and $3, hitting you with three fees instead of one.

I remember hearing about this a while ago, is that still going on? I thought some sort of regulation came into effect that prevented that, and that's why I was just then hearing about it.

Re: The most profitable source of income for banks? Overdraft fees

#80

Post by outworlder » Tue, Aug 25, 2015, 1:35 AM UTC

Karunamon wrote: post #63

fredkbloggs wrote: post #23

We could read 100 sob stories, or we could recognize that every single overdraft (other than errors and fraud, which do happen but are rare and these days invariably corrected) is voluntary . Yes, banks will make money any way that they can. Yes, they will happily take your last dollar, or even dollars you don't have and never will. No, they do not give one flying fucking rat's ass about you, your sister, or the home…

And the best part is, you're being downvoted for this.. I dunno, apparently a lot of HN thinks that it's impossible to believe that banks are generally run by bastards while simultaneously believing that 99% of these instances are completely voluntary and completely avoidable? If you keep track of what you're spending your money on, it's not a problem you're gonna have to ever deal with - and I say this as someone th…

Sure. For well-educated, silicon valley types with a resident accountant. You're missing out on the part that says that the poor (which many times goes with lack of basic education) are hit the most by these fees.

Not to mention that overdraft fees are a ridiculous concept to begin with.