Subscribe to this BlogFed falls flat with overdraft protection
In the year-ahead outlook for savings and credit that I wrote for MONEY's December issue, I reported that things weren't exactly 
going to be rosy next year. But I did point out one potential bright spot.
"Customers who have been on the receiving end of 'gotcha' practices that will earn banks $38.5 billion in overdraft fees this year may also get some relief," I wrote. "Many Capitol Hill watchers believe legislation reforming overdraft policies has a good chance of passage in 2010."
As I reported my story, I talked to several sources who felt that credit card legislation, which passed in May, gives overdraft reform some good momentum. Then, last week, the Fed announced new rules that would also limit overdraft fees charged by banks and credit unions. (See fellow MONEY blogger Beth Braverman's take on five ways you can protect yourself now.)
The Fed rules, which require that banks allow consumers to opt-in to overdraft protection on ATM and debit card transactions, are a step in the right direction. But as consumer advocate Ed Mierzwinski told The New York Times, "Some-of-the-time protection is never as good as round-the-clock protection." Congress still needs to pick up the slack. Last month, both Sen. Christopher Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.) introduced overdraft legislation, as well. Here's how Congress could do a better job than the Fed:
- The Fed mandates an opt-in program on overdraft protection for ATM and debit card transactions, but it says nothing about checks or recurring electronic payments. Congress could extend the opt-in requirement for all such transactions.
- Both Dodd's and Maloney's bills limit the number of overdraft fees banks can charge per month and per year. The Fed is mum on this issue.
- The Fed doesn't address the issue of merchant holds that can trigger overdrafts. When a consumer uses a debit card to book a car rental, pay for gas or hold a hotel room, merchants often put a hold on the funds in the customer's checking account — and that hold is typically for a lot more than the amount of the transaction. (Let's say you pay for gas with a debit card. Many stations will hold up to $150 in your checking account, and the actual number won't be reconciled until the transaction clears, possibly a few days later.) Such holds can trigger overdrafts because the consumer assumes that the funds in his or her checking account are available for other purchases. Congress should address this issue; even the Fed acknowledges that "a more comprehensive approach that involves financial institutions, card networks, and merchants may be required to effectively address these problems."
- Any opt-in program should also disclose the annual percentage rate you'll pay for the overdraft courtesy, says Mierzwinski.
Of course, all reform comes with some unintended consequences. We've already seen credit card issuers raise rates, cut lines and close accounts. And you can bet banks will find other ways to nickel and dime customers. As former banking exec Jake Drew told USA Today, "Banks are highly acclimated to exploiting the next great legislative loophole. The best banking reform efforts of the Federal Reserve and Congress, so far, are merely symptomatic and reactive."
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LOOK PEOPLE STOP ASKING FOR CREDIT IT IS ABOUT AS STABLE A WAY OF LIVING AS THE STOCK MARKET. LEARN TO LIVE ON WHAT YOU HAVE, CREATE BONDS WITH FAMILY AND FRIENDS TO SURVIVE. I PERSONALLY HAVE BEEN BURNT BY NOT BEING SMART I WILL NOT CONTINUE TO PLAY THIS GAME IF I HAVE NO CREDIT GOOD.
Trevor said:
"A dark little secret that is a big problem (having worked in a bank) is that banks post transactions in order of most to least expensive, not in order of time during the day."
Having worked at a bank myself, I can tell you that not all banks do this, and it is unfair to paint all banks in with the same brush. The bank I worked for specifically posted (a) all credits first and (b) smallest debits, then largest debits. Some banks actually do the right thing. I wouldn't might legislation that required this kind of posting order for all financial institutions.
Limiting the number of overdrafts a bank can charge is just plain stupid. Overdrafting your account is legally fraud (even when unintentional). Such legislation will mean certain people will have their accounts automatically closed and will be unbankable.
A dark little secret that is a big problem (having worked in a bank) is that banks post transactions in order of most to least expensive, not in order of time during the day. So if buy three $2 coffees that morning then have one $100 grocery bill that evening but only $99 in your account, you get tagged *three* overdraft fees for the coffees, not one for the groceries. There is absolutely NO excuse for that except that it provides more money for the bank.
This is ridiculous. Every time I read something about Christopher Dodd he's trying to do something new to baby irresponsible people at the expense of everyone else. Debit cards and credit cards are privileges and if you don't know how to use them then don't.
Banking is a business not a public service or charity. All of these banks are demonized by the financially illiterate. People talk about how these banks get rich off of their expense. The irony is that most profitable bank, Goldman Sachs, doesn't deal with the general public. All of the fees and interest rate hikes are to try and recoup the massive amount of loses banks have to take all the time because of us. All I can say is thank God financial institutions still put up with everyone and haven't just turned completely to investment banking.
Hi, EVIL BANKER here. I'm the jerk that tells you , "No, you can't get that fee back." You want to know why? Because in most cases, giving the fee back doesn't change anything. That customer will be in next week with more fees expecting a free ride again. Grow up. Take responsibility for your own actions, balance your check book, pay attention! My responsible customers, who balance their books, NEVER overdraw. Politicians are parading this issue around to get some good press, but it's only going to cause a situation where the responsible few are carrying more weight from deadbeats who don't or won't take responsibility for their own money. Do I get fees refunded if I overdraw? Nope. So what do I do? Pay attention, don't spend money I don't have, and if I screw up I take ownership of my mistake. Don't blame your bank because you can't control your spending!
The problem with our country today is that there is no sense of personal responsibility — everyone wants to blame someone else for their problems or sue them.
According to most studies, roughly 80% of bank customers never overdraw their accounts. If that's so, then why is so much attention focused on the minority? Just because it makes for good press and PR for the politicians?
If everyone out there complaining about this just took a look in the mirror and became more disciplined about their finances, this would not be an issue. Stop blaming others over that which you have complete control!
Tt's true that most people who overdraw their accounts do so consistently. However, banks have the right to close accounts for excessive overdrafts. They just don't most of the time because those accounts generate so much fee income. The practice hurts lower income people hardest, just like payday loans. It's a total scam.
This is absurd. Who WRITES these things:
{{{{The Fed doesn't address the issue of merchant holds that can trigger overdrafts. When a consumer uses a debit card to book a car rental, pay for gas or hold a hotel room, merchants often put a hold on the funds in the customer's checking account — and that hold is typically for a lot more than the amount of the transaction. (Let's say you pay for gas with a debit card. Many stations will hold up to $150 in your checking account, and the actual number won't be reconciled until the transaction clears, possibly a few days later.)}}}}}
A) Car rental places, hotels & airlines don't accept debit cards generally. Which is why in 2010 you need a real actual CREDIT card
B) $150 for a gasoline purchase? First this is set by the issuing bank not the gas station. There is usually a sign on the pump. I know AMEX & Discover hold $100 until the actual charge goes thru. Whenever I used my debit card as credit at the pump, I just see $1 as hold until the actual charge comes thru.
You can always have the station run the card thru their machine instead of pay at pump which is a dangerous idea with a debit card that has none of the protections that credit cards do
Hey Julian, that's the beauty of capitalism, if you don't like what banks are doing, then don't give them your money. And last time I checked, nobody is forced to use a credit card or their debit card. Pay cash and I promise you'll never be charged a fee. GROW UP PEOPLE!!! Banks, debit and credit cards are luxury items. Nobody is forcing you to use any of these items.
How do you suppose the banks are going to make up the lost income? Let me clue you in….the monthly account service fees will go up. In a nutshell, the GOOD customers will end up paying so that the deadbeats can write bad checks all over town.
Same holds true for credit card reform. Banks will institute enormous annual fees for ALL card holders so that the deadbeats don't have pay their bills on time.
How about mortgage assistance? Pay your mortgage on time? Good for you…you get nothing. Can't (or don't feel like) paying? Don't worry the taxpayers will help you out.
Anyone a little worried about the mentality of our congress in regards to all of this? What message is this sending?
The reality is that EVERYTHING from health care to bailouts to simple decisions is based on two simple things…MONEY & POWER. Have's & Have Not's. What do the rich people worry about, GETTING MORE MONEY. Its not going to "change" anytime soon.
Now – get with it everyone. The banks are not entitled to exact large fees simply for an overdraft – besides they always take the largest amount and charge overdraft fees on the smaller amounts. Is that stealing, extortion, what – there is no recourse for this because the banks already have our money. I have had to correct many mistakes made by my bank with no apologies or refunds. It is cold calculated theft.
In England the banks were taken to court and held accountable for overcharging fees and had to give back millions because it was found out that the cost of an overdraft fee was only 6.00 for the bank. No more banks for me – I'm going to a credit union and everyone should do the same!
Right, because any simple math error when balancing your checkbook or a moment of absent mindedness at the checkout register deserves to be punished with potentially hundreds of dollars in cascading overdraft charges. If banks had applied their overdraft fee structures in a proportionate and ethical manner to begin with, then they wouldn't find themselves in the position of needing to be regulated.
Umm hey Donna, you might want to remember that the banks are using YOUR money and making money off of YOUR money from interest. Banks are borrowing YOUR money from YOU and lending it to OTHERS with LOTS of interest.
So given that, tell me how banking is considered a privilege for me and not a right? Sounds like it should be a privilege for the bank to use MY money for free.
If people managed their checking accounts correctly,they would never have incurred overdraft fees in the first place. Isn't banking a privilege and not a right? If you don't like the "rules" then don't open a bank account. Afterall, banking is a business and aren't all businesses entitled to make money? How do you think the banks pay for YOUR FDIC insurance? By charging fees you idiots!
Congratulations. That may be the most ignorant comment ever made in the history of the world.
Donna -While I cannot disagree with your statement that "If people managed their checking accounts correctly, they would never have incurred overdraft fees in the first plact". However, are not supposed to let people spend beyond their means purposely so they can make money off of them. I call that un-ethical though totally legal. I think it's a good move by the Feds to help consumers how are not very financially savvy better manage their money.
Yes, banks will lose money but banks have been very un-ethical with their practices that have led consumers to drown in debt.
Thanks for your feedback, however.
There are certainly some abuses out there but if we let Congress blow up the system entirely to save the consumer from themselves the unintended consequences could be even worse. In the end, financial institutions need to make a buck. What Congress is looking at will hurt more than a few financial institutions, it will drive up risk to many small business people as they deal with more returned checks or fewer sales due to declines at the point of sale. It will result in significantly higher operating costs for software and hardware for both banks and merchants. Who pays when costs go up, might it be the consumer we are trying to save from themselves?
My understanding is that credit card processing companies are the ones who place the holds on your account, NOT the merchants themselves.
It is illegal to overdraft your account, writing a bad check is fraud. Also, If a bank is willing to pay your overdraft, it is a loan that they should earn a fee on.
Donna, in response, maybe they should pay for the FDIC insurance with the interest they collect? Just a thought, and being a responsible banker myself, even if you have the money, they can find ways to clear and hold transactions in different orders to incur the most revenue. they've spent milions in computer software to perfect it, I know I helped!
Donna, above, should be horsewhipped. Banks have been stealing money for decades. How many trillions of dollars have they stolen in usurious credit card interest rates. Usury use to be a crime before banks controlled congress!Donna, above, must work for one of the thieves.
The statement about as much as $150 being held for gas purchases is wrong… The majority of stations hold $1. And when the charge comes through 3 days later and the full amount is deducted.
Also if people kept track of their account balance they would not recieve overdraft fees. Having managed a bank for 6 years the folks who are getting the fees consistently get the fees. And when asked to see a check register to see the reason they feel the bank made an "error" and should not have charged them an overdraft fee. They never have one!!!!
Banks are reasonable about refunding overdraft fees coming to a compromise when a customer recieves a fee and it does not happen all the time.
If you don't like your banks' fees, go to another bank. This isn't the federal government's jurisdiction. This is a free market issue. An overdraft fee is an appropriate response to checking account abuse. Yes, the hold thing can be a pain but your bank should make right on it after the actual amount posts. If they don't – go to another bank.
If people managed their checking accounts correctly,they would never have incurred overdraft fees in the first place. Isn't banking a privilege and not a right? If you don't like the "rules" then don't open a bank account. Afterall, banking is a business and aren't all businesses entitled to make money? How do you think the banks pay for YOUR FDIC insurance? By charging fees you idiots!
I think most of you are missing the point here,while I agree that everyone should be responsible enough to manage thier checking account the problem lies with the banks taking advantage of someones mistake may it be a rich person or poor person all transactions should be subtracted from an account in the order they are debited or charged if anyone can remember not to long ago this was the way it was done if you did not have money in your account you could not use an atm or debit. If anyone thinks for one minute that overdraft courtesy is there to make you life easier you have even less brains than the person overdrafting thier account. The banks hace specific software to make sure they can maximize fees. The only reason the goverment has let this go on so long is because thats less money they have to send the banks for bailout….. Oh and one more thing stop knocking the poor the rich do twice as much damage to the economy when they screw up overdraft fees are nothing compared to the millions that are bilked…