Tuesday, March 08, 2011

Do bank customers secretly love their overdraft fees?

According to Minneapolis newspaper the Star Tribune, since certain new banking laws went into effect limiting the ways in which banks could charge overdraft fees, apparently customers miss them, and so badly, that they ask the bank to charge them, anyway.

All right, that's a little over-simplified, but essentially true.  Here's the gist of it: bank are no longer allowed to approve your debit card if there are not sufficient funds in the account, thereby being able to charge you seemingly endless overdraft fees, due to the way that banks are allowed to manipulate the order of transaction posting.  That is, unless you ask them to.

Sometimes, of course, over-drafting can be  helpful.  If, say, you have $5, need gas to get to work, but don't get paid for a week, over-drafting, while not ideal, is one option if there are no others.  Of course, some people will want to choose the option to overdraft.  But most people?  Says Chris Serres of the Star Tribune:
To the surprise of almost everyone, three out of four Americans with checking accounts have signed up for overdraft protection since November 2009, according to a new study by economic research firm Moebs Services. That's despite new federal rules that require banks to get permission before charging customers $25 or more when they overdraw their accounts[...] 
But public fury over the overdraft charges may have been more manufactured than real. People may grumble about the fees, but millions who live paycheck to paycheck rely on overdraft protection as a backstop when their accounts run dry, researchers say. 
They also lack alternatives. Many consumers are signing up for overdraft protection, in large part, because they can't qualify for credit cards, home equity loans or other forms of short-term credit, say experts. Check writers also fear the embarrassment of having their payments rejected for lack of funds -- a fear that some banks have exploited to get people to sign up.
No, the public fury over the overdraft charges was not manufactured.  But the new regulations, while a great step forward, do little to address the crux of the problem.  The problem consumers had was not that the bank dared to charge them for over-drafting; most people understand that being charged a fee for spending someone else's money is reasonable.  The problem is the sheer abundance and extremity of said fees.  If a customer "opts in," the bank doesn't have a limit to how many, or how many different types of fees they can charge.  And this isn't new; banks have just exercised more restraint in the past, before all these new regulations went into effect, potentially drastically reducing fee-related profit.  For example, prior to this law, my former employer, TCF Bank, limited the NSF fees they would charge a customer to 5 per day, regardless of the number of overdrafts accumulated by the end of the business day.  This was very generous, compared to other, larger banks like Wells Fargo and US Bank.  Since the passing of this legislation, though, they removed their limit, and both TCF and US Bank (among others, surely) will start to charge a daily "negative balance fee" if funds aren't deposited to cover the overdraft. 

Due to banks manipulating the order of the posting of debit card transactions, customers are often surprised to learn that, rather than the one overdraft fee they were expecting for that tank of gas, that they were also charged overdraft fees for each additional pending transactions in their account, because they were posted from largest dollar amount to smallest dollar amount, rather than chronologically.  Rather than one $35 penalty for being broke (really, that's ultimately what it is for a lot of people), they are now upwards of $200 in the hole.  

Leaving aside the fact that "opting out" of "overdraft protection" only applies to debit and ATM card transactions and does not change whether or not checks are paid (a mistake the author makes repeatedly), there's an obvious answer to this question of why customers' attitudes about overdraft fees seem to have changed drastically: the numbers don't reveal the fact that consumers want overdraft protection, they reveal that they are signed up for it.  Willingly or unwillingly, we don't know... for sure.  As Serres noted, perhaps bank employees are instructed to exploit customers' fear of having their card declined.  Or, hey, I have a guess... maybe they're giving customers misinformation, making threats, and given generous incentives to convince people to sign up.  Or, hey, maybe some unscrupulous teller or banker, under pressure from her low-paying and sales-heavy employer, is just plain signing you up, whether you wanted them to or not.  From the Strib article:
Consumer advocacy groups argue that banks have used aggressive marketing to get millions to sign up. In some cases, banks suggested that checking accounts would not work properly -- or customers would be charged a bounced-check fee -- if they didn't enroll in overdraft protection, consumer groups maintain. 
"There were a lot of scare tactics," said Gail Hillebrand, a senior attorney with Consumers Union in San Francisco. "Banks were basically calling and inducing people into thinking they had to do something, when in fact they didn't have to do anything at all."
I'll say.  I worked at TCF when all of this was happening and, while I didn't work in the branch, I saw their bulletins, which detailed all of the times in which a teller and banker were to pitch overdraft protection (all the time) and what emotionally manipulative phrases to use.  Naturally, banks deny that anything unscrupulous (or, at least, officially illegal) happened:
Bankers strongly object to the accusation that they misled or scared customers into signing up for the product. Under the new regulations, banks were required to provide consumers with a standard "opt in" form, including a description of overdraft fees and less-expensive options, such as linking checking to a savings account.
Banks were supposed to inform customers of the new regulations, and give them their options, not coerce them into signing up for something they weren't given any decent information about.  And since they mentioned so-called "less expensive" alternatives, let's talk about those.

Linking a checking account to a savings account as a method of overdraft protection is a good idea, in theory.    You're allowing the transferring your own money to cover your own deficit.  That's not the end of it, of course.  Since the bank is making the transfer rather than you, they charge you a transfer fee, averaging around $10, in my experience at TCF and Wells Fargo.  Here's what they never, ever bother to tell you, though: Regulation D.  Federal Regulation D restricts the number of transfers you can make out of your savings account each month.  You are allowed unlimited transfers or withdrawals from tellers or ATMs, but online transfers and ACH withdrawals are limited to 6 per month.  The purpose of this is to deter customers from removing money from their savings account, as deposited money in a savings account is what allows the bank to lend money.  

If you overdraft more than 6 times in one month and your overdraft protection linked to your savings account kicks in each time, you'll get a warning from your bank, and if it happens a second time, you will be charged upwards of $30 for the infraction.  Any more times and you are likely to have your savings account closed and funds transferred automatically into your checking, without your prior authorization.  You see, you already authorized that you understood and agreed to follow those rules when you signed up for your checking account and forgot to read the Terms and Conditions.

(This reminds me of a department-wide metting I attended while I worked in the call center, headed by all the important managers that ignore you when you say hi to them in the coffee room.  They were just unrolling this savings account linking option, and I asked if the transfers applied to Reg D.  No one knew.  I was eventually emailed and confirmed what I already suspected: yes, overdraft protection transfers do count against your 6 Reg D transfers.)

Back to this overwhelming number of people "opting in" thing, though.  As I said, my former employer was rather aggressive in their marketing tactics to get customers to grant them permission to charge them unlimited overdraft fees.  According to Serres,
TCF Financial Corp., the Wayzata-based regional bank, was particularly aggressive. In addition to sending postcards and e-mail alerts, TCF's tellers pitched overdraft protection as customers walked into a branch or pulled up to a drive-through window.
The marketing blitz proved effective. About 90 percent of TCF's new customers enrolled in overdraft protection since the new rules went into effect. About 65 percent of its existing 1.3 million checking-account customers enrolled.
They'll also allow you to change your mind at the ATM.  So if, say, you go to the ATM to withdraw some money but don't have available funds, the TCF ATM will helpfully ask you if you'd like to change your mind and opt in.  You want money, right?!

Sorry, but I don't buy it.  I don't believe for a second, based on my experiences at banks and with bank employees-- especially those who work on commission; sorry, but it is true and will remain true until the entire structure is changed -- and the comments at the bottom of the Strib article, and the stories I've heard, and the simple fact that it doesn't take a genius to get that banks and other large companies exploit and lie to their customers (or are instructed to do so) in order to make a profit... that there wasn't an abundance of deceptive bullshit surrounding the apparently bewildering fact that 4/5 customers "opted in."