If you’re not rich, your bank probably wants you to overdraft • Hacker News Board

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

#21

Post by flagnog » Mon, Aug 26, 2013, 7:29 PM UTC

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…

wtf? If the person can't be bothered with keeping track of their charges, they deserve a penalty.

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

#22

Post by [deleted] » Mon, Aug 26, 2013, 7:49 PM UTC

zinkem wrote: post #17

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.

[deleted]

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

#23

Post by kyllo » Mon, Aug 26, 2013, 7:52 PM UTC

jljljl wrote: post #20

kyllo wrote: post #14

Earlier quoted context omitted.

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 card…

This is true in most cases, but merchants have a lot of tricks they use to try to reduce the amount of credit card interchange fees they pay. A lot of businesses actually do charge a "convenience fee" for using a credit card, or offer a discount for paying in cash, or they set a minimum purchase amount at which they will accept a credit card, etc. A lot of businesses also flat out refuse to accept cards like AMEX and Discover because of their higher interchange fees.

It would be interesting to see how this equilibrium might change if CC companies tried to increase interchange fees across the board. I think they would see a lot of resistance from merchants and possibly even government scrutiny and lawsuits. Don't forget that the CC companies have to compete with each other, and cannot collude to raise interchange fees.

Anyway, my point was not that higher interchange fees wouldn't get passed on to consumers somehow, it was more that if most cardholders stopped carrying a balance and paid much less interest to CC companies, and CC companies then increased their interchange fees to try to compensate for the decline in interest revenue, consumers as a whole might still be better off than they are now. There's more than one variable in the equation here, and right now credit card interest is probably a much bigger cost to consumers in the economy as a whole, than interchange fees are.

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

#24

Post by EliRivers » Mon, Aug 26, 2013, 7:58 PM UTC

zinkem wrote: post #17

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.

You're right in the first step; we can only end up with the 30000 dollars if the money is deposited and relent several times ( http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam... ). The example uses a single bank, but given that all the money goes through various banks as people borrow it and put it somewhere, I could still expect my 1000 dollar deposit to end up in aggregate as a 30000 dollar loan.

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

#25

Post by dev_jim » Tue, Aug 27, 2013, 9:41 PM UTC

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…

"That's a circular argument"

If it sounds like a circular argument to you then that's because economics involve systems of feedback. It's not as simple as A causes B. A has an effect on B which has effect on A. This isn't a very difficult concept that you needed to waste 4 paragraphs on.