Overdraft charges have banks turning small misfortunes into gold

Not so long ago, when people “bounced” a check, the bank refused it and the store to which it was written had to find the check writer to get paid.

In the 1990s, a handful of financial services consultants contracted with most banks to implement “bounce protection” plans, promising greatly increased profits. Often these plans were embedded in “free checking” accounts without the account holder’s knowledge.

It was much easier for a bank to collect on a bad check than a private shop owner, as they had all their personal information and it was likely they’d be depositing money soon.

Banks liked to call such plans a “courtesy” service to help customers avoid “the embarrassment of a returned check.” Still others promoted it for unexpected emergencies if you “run out of cash between paydays.” 

And it worked out very well for banks. But the big payday came when debit cards exploded on the scene and cups of coffee and 99-cent music downloads became commonplace debit card purchases. The price of a overdraft ballooned to in the neighborhood of $35. 

The big problem is that millions of bank customers were operating under the assumption that if their account went to zero, their electronic transactions would be refused. Not with this “courtesy” plan. That $3 coffee may be costing $38. And three 99-cent music downloads may cost over $100. But you won’t know it until you get your bank statement. 

I agree, people should keep track of their account balances. But the penalty should fit the “crime.” Banks like to call these charges fees. But they are actually loans under Truth in Lending Act guidelines. These loans can incur interests amounting to thousands of percent. Payday loan operators can only dream of such profits.

Unfortunately, customers who get gouged on these loans have little recourse. Changing banks costs money and is a hassle. Besides, almost all the banks in Culpeper and elsewhere have essentially the same scandalous policies. Many never complain, feeling like it was all their fault and they deserved it.

Banks love it. It costs them about a dollar to administer an overdraft protection and charge $35, a nice profit. One congressional estimate indicates that banks will make $38 billion on this scam this year.
This is the same industry that we bailed out with $700 billion in 2008. Unpaid balances on credit cards accrue at about 18%. A $10 overdraft at that rate would take seven years for the bank to net the typical $35 they make in one day with overdraft protection.

But wait, there’s more. Banks also may manipulate the order of the debit charges that comes in. If five small charges come in before a large charge, that large charge may go to the front of the line, possibly triggering five $35 overdrafts rather than one.

Naturally, most overdraft charges are made to lower-income people. Perhaps the most despicable practice is that a federal loophole allows outrageous overdraft protection charges to be immediately deducted from automatically deposited Social Security checks. Normally, only the IRS has the ability to garnish Social Security checks. If they’re doing this, what else are they doing?

What can you do? Check your bank’s policy on overdraft charges. You have options. Change it to something that fits your best interests. Every single bank executive does.

Legge’s column runs every other Thursday.