I don't have a debit card, so my assumption was debit cards were (in theory) like cash. When the account your debit card was connected to hit zero (i.e. if you had zero cash in your lint filled pocket) you can't buy anything more. But that would not be a profitable enterprise for our banking industry. :) I actually can see both sides of this story and frankly it's to the point that if people have no idea what is in their bank account, let them eat cake! [May 29, 2009: USA Today - Banks Find Ways to Boost Bank Fees] $34 seems a bit usurious but I propose moving this up to $500 for each overdraft... than maybe Americans will pay attention?

We noted debit usage actually surpassing credit usage earlier this year. [May 2, 2009: WSJ - Debit Card Use Overtakes Credit] This (ahem) overdraft fee on debit cards should be a larger issue as credit (debt) becomes less cool - as we saw yesterday this trend is happening quickly - and paying with money you actually have (so retro!) comes back into style.

Cash seems so simple, never heard of anyone being hit with an overdraft fee on it either. But I'm old school.

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Via NY Times

  • Banks and credit unions have long pitched debit cards as a convenient and prudent way to buy. But a growing number are now allowing consumers to exceed their balances — for a price. (always a catch, read that size 4 font print folks)
  • Banks market it as overdraft protection, (we have your back, dear customer... as in we have your back pocket) and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.
  • ... an additional $11.5 billion arrives from bounced checks and other instances in which banks refuse to pay overdrafts.
  • By contrast, penalty fees from credit cards will add up to about $20.5 billion this year.

Here is the kicker:

  • In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

That's pretty impressive.

Actually this is the real kicker ...

  • 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

Which implies that without these overdraft fees, half our nation's financial institutions would not be able to run at a profit. Which means they'd go out of business (sic)... which means they'd be bailed out by the taxpayer.

Really is the core business when the Fed hands out money at almost nothing and you lend to the American peasants at much more than nothing that hard to make a profit at? How are half the banks not able to make a mint doing that? (we need to pay our top executives all our profits) ... oh yes, good point. Carry on them - more overdraft fees please.

  • But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer’s transactions in a way that causes more of them to incur overdraft fees. (cmon now, that would never happen - call in the attorneys, the New York Times is getting a libel suit)

The following phrase is rich....

  • Debit has essentially changed into a stealth form of credit,

really; is there anything more to say. I have been educated on what debit truly is; here I was heartened by Americans sticking to spending what they had in their bank account by this growing use of debit. Ah, can't be idealistic for even a moment these days.

  • .... three quarters of the nation’s largest banks... automatically cover debit and A.T.M. overdrafts. (how kind of them; strange when the credit card exceeds limit you can't buy more - but not an issue with debit. Strange as in predictable)

Not surprisingly this act is far more prevalent at our large banks (again, I ask at this point why anyone bothers to bank with the giant oligarchs - go local)

  • According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent.

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I know regulation is an evil word in our (cough) free market, but I'm at the point where we need to regulate people from themselves. A portion of our population is so inept, and this population constantly gets my money due to their actions, I think regulation has to go into turbodrive. Because there is no free market - the free market in the US is taking from me to give to them, after their repeated mistakes. Since that is the only choice of politicians, (and will never change due to self interest of politicians) I want 1 million new regulations not allowing this group of people to take even 1 step into the financial world without 50 other people looking over their back. That's the point it has come to. Otherwise they claim I was duped! and send me some money fellow taxpayers!

So where are the (captured) regulators? Wait, you mean the same guys who are proposing mortgage oversight in 2008? Yes those guys who make a closing barn doors once the horses are 8 miles out.

  • Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees.

And really why would they? Lobbyists for this industry get very very mad - and the last thing we need are bitter politicians with lobbyists who might not fund campaigns.

  • The Federal Reserve is considering requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers like Mr. Means are not caught unaware at the cash register.
  • (in 2005) the Federal Reserve said that some banks had “adopted marketing practices that appear to encourage consumers to overdraw their accounts.”

So what did the Fed do?

  • It issued a list of “best practices” that asked banks to more clearly disclose overdraft fees, let customers opt out of overdraft programs and provide an alert when a purchase occurs that would put the account below zero.

Ohhh.... that'll teach 'em! Shiver me timbers! A list! I bet it was at least 2 pages long to boot... scary stuff, I can see the oligarchs must have immediately retreated to fetal positions once they got the fax from D.C..

  • But critics said the recommendations had no teeth. “No regulator has made any of their bank examiners adhere to best practices,” said Mr. Halperin, of the Center for Responsible Lending. “The result is over that time period consumers have paid probably upwards of $80 billion in overdraft fees while the Federal Reserve considers and considers and considers whether or not they are going to do anything.”

Give that Federal Reserve more power - they deserve it. As the foremost financial regulator they also enjoy watching horses run wild, while locking the barn door and patting each other on the back for securing the (empty) barn.

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Meanwhile back on the oligarch farm...

  • But with so much at stake, the banking industry is intent on holding its ground.
  • Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date.

My gosh, I admit I giggled at that excuse. Thank you for helping the social life of men (or women who pay) across America by not allowing us to suffer the embarrassment... in that case, why do you allow this injustice to happen with credit cards? Shouldn't you advance $50-$100 extra for those suckers who whip out the credit as well? I mean, you are just doing this to help us out after all.

But if any act of God, somehow legislation is passed - don't you worry, half our banks won't go out of business.

  • ....some banks have said they might slap a monthly fee of between $10 to $20 on every free checking account. (I assume you'll remove the word 'free' at that time? or would that not sucker enough people who don't read fine print?) At the moment, people who pay overdraft fees help subsidize the free accounts of those who do not.

How about running a viable business where you make money taking money in and loaning it out at a higher rate, at appropriate rates... you know, like banks used to do a few decades ago. Is that so out of the box? I know, I know - it would be impossible to pay the salaries of the top couple folks and justify their financial innovation if we had to do that, but really if we strip it down - what innovation do we see here? Nothing contributing to greater society.

Apparently this was not an issue until 1994 came along and financial innovation (give that man a raise, a huge one) was borne.

  • William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.
  • “You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Discovering a new medical break through? Boring. Solving scientific mysteries. Yawn. Finding ways to usher in new fees to feed the financial oligarchs. Priceless. Now that's American innovation. (with the consumer salary structure)

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Our cursory anecdotal sucker... err, customer below.

  • When Peter Means returned to graduate school after a career as a civil servant (well that was Mr. Means first mistake - giving up a life as a civil servant to potentially be exposed to the private sector?), he turned to a debit card to help him spend his money more carefully.
  • So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws (screws - literally!) — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.
  • Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. (Mercy is not a word oligarchs have in the dictionary, sir) In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.
  • Rory Foster, a former branch manager in Illinois, said that Wells Fargo based its compensation for managers in part on overall branch profitability. Fee income, including that from overdrafts, is part of the calculation.

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With that said, going back to what I wrote in the beginning of the piece - let Darwinism play out. If 14% of the people are 90% of the issue - let them go bankrupt and deal with their inability to figure out the banks are playing them for fools. Don't make me subsidize them - thank you very much.

  • Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

How about sending these folks to remedial (or first time) home finance workshops. And for the first year after class having a consenting adult (with FICO over 700) sign off on all their purchases. Sort of like a teenager who needs supervision. I know it's unfair and mean spirited, but so is taking money from me so I can subsidize them. The free market working its charms is killing me in the wallet. Let financial Darwinism work its magic...