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If you’re not rich, your bank probably wants you to overdraft

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Re: If you’re not rich, your bank probably wants you to overdraft

#11

Post by otterley »

jmduke wrote: post #3

While I think overdraft fees are gross and exorbitant (and I fell at their mercy a few times before I finally wizened up and got overdraft protection), I don't really think this is that big of an issue (at least, compared to other issues in the banking system.) It's a pretty solvable problem from the consumer end -- don't spend money on a card if you're not sure you have at least X in your account.

This is needlessly burdening the customer, which in my opinion is the textbook definition of bad customer service. The days of hand-written checks in the consumer space are largely gone; and the bank knows at any given moment what the customer's current account balance is and which transactions are pending. Permitting a card-based withdrawal or debit request that the bank already knows is likely to result in an NSF at settlement time is both misleading and adversarial to the customer.

This entire issue would grind to a halt immediately if banks properly denied debit requests when permitting them would yield an NSF.

Re: If you’re not rich, your bank probably wants you to overdraft

#12

Post by tadfisher »

shawnee_ wrote: post #10
gbhn wrote: post #7

The graph in the article suggests the bank's cost for a checking account per year is $250. Wow. That seems like a huge opportunity to provide better banking service. Driving that cost down to $100 or so would be a very big deal.

According to the CFPB, The banking industry charged a total of $32 billion in overdraft fees to consumers in 2012, an increase of more than 60% from $19.9B in 1990. Part of this increase is that banks have been turning the screws on consumers, increasing the average overdraft fee from $27 in 2007 to $34 today. Those fee increases would be more acceptable if they went to cover the costs associated with those transacti…

On the other hand, the big banks are creating a market opportunity for retail banking services that do not profit from fees. I chose to work at Simple [1] in part because I believe competition in this space will improve the industry as a whole.

The best weapon against predatory banking is giving customers the tools to understand their own finances. Because fees comprise an ever-growing portion of profits, it is not in the big banks' interest to provide these tools, thus they will always be a poorer experience than the services that do.

[1] https://simple.com

Re: If you’re not rich, your bank probably wants you to overdraft

#13

Post by jeffasinger »

tyree732 wrote: post #9
mbateman wrote: post #4

Overdraft fees are absurd, but so is complaining about them. Just go to your bank and ask them to disable overdraft. If you don't have the money and overdraft is disabled, the transaction will simply be declined. If you want to spend money you don't have yet, you can do it the normal way, by borrowing. (Also, flagging the article.)

So, that seems like a reasonable answer, but historically that wasn't sufficient for me. When I was an HSBC customer in college a few years back, I had disabled overdrafting because I did not want to receive overdraft fees and, in a pinch, I could use a credit card if my charge was declined. One day I checked my account and discovered that I had accrued a number of overdraft fees. Apparently sometimes merchants (name…

Also, sometimes ACH debits will cause unpreventable overdrafts for you.

What I do now (I realize this isn't really an option for a lot of people) is basically mentally subtract $500 off of my checking account balance, and would never spend any money if there's less than that in there.

Re: If you’re not rich, your bank probably wants you to overdraft

#14

Post by kyllo »

dev_jim wrote: post #8
kyllo wrote: post #2

Yes, and to add to that, credit card companies do not want you to pay your balance off in full every month, because even though they get a 2-3% cut of every credit transaction from the merchant, interest is still how they make most of their money. I have heard that within the credit card industry, they even colloquially refer to such responsible cardholders as "deadbeats!"

Interchange fees would have to be much higher if they were a larger percentage of a credit card company's revenue (as they are for AMEX). This would end up resulting in higher costs for consumers.

That's a circular argument--there are obviously two ways that the share of revenue from interchange fees could become higher than they are now--increase the interchange fees, or decrease the interest rates, membership fees, and other revenue sources (or both).

Higher interchange fees would necessarily "end up resulting in higher costs for consumers" only if the interest rates didn't also decrease. Are you assuming the credit card company's total revenue is a fixed constant?

Or are you just suggesting that if a very large group of cardholders collectively decided to pay off their credit card balances in full every month so that credit card companies didn't make a cent in interest off them, that credit card companies would simply increase their interchange fees to compensate? Perhaps. But then a lot of merchants would stop accepting credit cards. They could face antitrust litigation again. Perhaps they would just add/increase yearly card membership fees, cut back on rewards, lay off customer service staff, etc. Who knows? They make their money in several different ways, and each of those they are already squeezing as much money as they possibly can out of consumers and merchants.

The way I see it, as a responsible cardholder who pays my bill in full every month, merchants and irresponsible users of credit are just subsidizing my free 30-day loans, cash back rewards, and frequent flyer miles, and I'd prefer that they keep doing so.

Re: If you’re not rich, your bank probably wants you to overdraft

#15

Post by EliRivers »

Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account.

I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a year because I have 1000 in my account.

The magic of fractional reserve banking. If I've misunderstood this, I'd very much like to be corrected, please.

Re: If you’re not rich, your bank probably wants you to overdraft

#17

Post by zinkem »

EliRivers wrote: post #15

Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account. I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a yea…

I don't think it quite works this way... if you deposit $1000, the bank isn't required to keep $1000 on hand, so with your 1/30 ratio, it means they would hold onto about $34 and loan out the rest with interest.

I am definitely not an expert on banking.

Re: If you’re not rich, your bank probably wants you to overdraft

#18

Post by chiph »

gbhn wrote: post #7

The graph in the article suggests the bank's cost for a checking account per year is $250. Wow. That seems like a huge opportunity to provide better banking service. Driving that cost down to $100 or so would be a very big deal.

Banks have a lot of overhead. Typically, they do not write their own software - they buy a package (and spend nearly as much time/money writing integration code, but that's a separate topic.) There's also mandatory costs -- SOX says you must have a disaster recovery plan in place, and you must conduct regular tests. You must have access controls in place, which includes things like mandatory vacation time for sysadmins and developers (so they can't write backdoors into the systems).

Customers not having access to their funds because of system problems is highly frowned upon by regulators, so high-availability with redundant computers + software is a given. Passing a SAS-70 audit is just the beginning.

Re: If you’re not rich, your bank probably wants you to overdraft

#19

Post by jeffasinger »

otterley wrote: post #11
jmduke wrote: post #3

While I think overdraft fees are gross and exorbitant (and I fell at their mercy a few times before I finally wizened up and got overdraft protection), I don't really think this is that big of an issue (at least, compared to other issues in the banking system.) It's a pretty solvable problem from the consumer end -- don't spend money on a card if you're not sure you have at least X in your account.

This is needlessly burdening the customer, which in my opinion is the textbook definition of bad customer service. The days of hand-written checks in the consumer space are largely gone; and the bank knows at any given moment what the customer's current account balance is and which transactions are pending. Permitting a card-based withdrawal or debit request that the bank already knows is likely to result in an NSF a…

I agree that this would work for debit transactions, but, my understanding is that the way ACH works, it would be rather difficult to accomplish this.

Re: If you’re not rich, your bank probably wants you to overdraft

#20

Post by jljljl »

kyllo wrote: post #14
dev_jim wrote: post #8

Earlier quoted context omitted.

Interchange fees would have to be much higher if they were a larger percentage of a credit card company's revenue (as they are for AMEX). This would end up resulting in higher costs for consumers.

That's a circular argument--there are obviously two ways that the share of revenue from interchange fees could become higher than they are now--increase the interchange fees, or decrease the interest rates, membership fees, and other revenue sources (or both). Higher interchange fees would necessarily "end up resulting in higher costs for consumers" only if the interest rates didn't also decrease. Are you assuming th…

>>> Higher interchange fees would necessarily "end up resulting in higher costs for consumers" only if the interest rates didn't also decrease.

Businesses do not pass on interchange fees directly to the customer. It is not a line item that appears on your receipt after you make a purchase. This is largely because credit card companies forbid merchants from charging an additional fee to customers for using credit cards.

This means the only way for merchants to recoup interchange fees is to raise the prices of their goods across the board. This means prices go up for everyone, even those without credit cards. So a non-credit card user would see their prices go up as a whole, without the potential offset of reduced interest costs.

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