Banks rapped on cost of bounce protection

The Boston Globe ^ | February 23, 2005 | Bruce Mohl

[A. Pole]

Banks used to frown on customers who overdrew their accounts, but not any more.

Bank of America and Citizens Bank are offering a loosely regulated service called bounce protection, which automatically allows customers to overdraw their accounts by several hundred dollars at an automated teller machine or while using a debit card at a restaurant or store. Customers are charged fees ranging from $17 to $33 each time they overdraw their accounts unless they opt out of the service.

That means if a customer who has $200 in his checking account and withdraws $300 from an ATM machine or spends $300 at a supermarket can be charged a $25 fee for that $100, which translates into an annual interest rate of nearly 1300 percent. Consumers are typically not alerted that they are overdrawing their accounts at the time of the transaction.

[...]

The emergence of bounce protection is coming at a time when consumers are more likely than ever to overdraw their accounts. A new federal law that took effect last year dramatically reduced the amount of time for a check to clear, but the clearance time for deposits hasn't fallen commensurately.

[A. Pole]

Free market bump.

[Texas_Jarhead]

"A new federal law that took effect last year dramatically reduced the amount of time for a check to clear, but the clearance time for deposits hasn't fallen commensurately."

And thus the "float" was transfered to the bank.

[supercat]

Hmm... my credit union charges interest (12% APR) by the day, with no transaction cost. So if my account is overdrawn by $100 for one day, my credit union charges me 4 cents.

[A. Pole]

Hmm... my credit union charges interest (12% APR) by the day, with no transaction cost. So if my account is overdrawn by $100 for one day, my credit union charges me 4 cents.

We need to shove aside them pesky credit unions.

[StopThePress]

Actually, even if a bank doesn't offer "bounce protection" as an outlined service, they do offer it to virtually all customers implicitly. The bank I work for uses a "CEM" grade for each customer, which is a dollar amount the customer can overdraft their account by. The CEM amount is determined by the customer's history (no new accounts < 30 days old), account status (< 0-2 NSF/Overdrafts per year), average daily balances of all their accounts, etc.

In the case of a "normal" demand deposit account, if the customer overdrafts the account, rather than return the item as NSF, the bank may choose to pay the item and still charge an NSF fee. At least twice a month, the bank's systems will evalute the customer's "grade" and change it to reflect their "status". Its virtually the same damn thing as "bounce protection". Now the banks just decided to disclose what they do by naming it "bounce protection". Hilarious.

[yankeedame]

That means if a customer who has $200 in his checking account and withdraws $300 from an ATM machine or spends $300 at a supermarket can be charged a $25 fee for that $100,...

Or, w/o the "bounce protection" it can mean:

• the check hits the bank. It bounces. Bank charges $15.
• the check is submitted a 2nd time. It bounces, again. The bank charges $15 a second time.*

  Total so far: $30

  Supermarket sends you a brisk note informing you they have your check and would like you to redeem it within 30 days + $35 (or $50)

  Grand total: $30 + $35 ($50) = $65 ($80)

  All things considered, the $25 bounce protection is a bargain.

  *Here in the state of Ohio if your check bounces once but clears the second time state law allows the merchant to charge you $25-$35 or so for having to resubmit the check a second time. (Yup, I learned this the hard way.)

[lewislynn]

And thus the "float" was transfered to the bank.

The bank always had the float advantage. Now the customer is robbed of the float while still getting screwed by the hold.

I'd be real interested to know if banks claim, in their daily balance, the assets of the undeposited checks they hold ...wanna bet they get the benefit of your money while they deprive you of it.

[Texas_Jarhead]

"I'd be real interested to know if banks claim, in their daily balance, the assets of the undeposited checks they hold..."

this is what I was attempting to refer to

[NoControllingLegalAuthority]

I've never seen an item on a bank balance sheet called "uncleared deposits."

Banks are absolutely reprehensible institutions. A pawn shop or check cashing service is more fair than a commercial bank. A bank charges $30 even for an NSF check of $5.00. Even the so-called loan shark services make the charges proportional to the amount needed.

[supercat]

All things considered, the $25 bounce protection is a bargain.

Except when compared with a credit union that would charge $0.28/week while an account was $100 overdrawn.

[Tall_Texan]

That $25 fee seems logical to me since, otherwise, the bank is hitting you with a $25 check-bouncing charge and the company you wrote the check to is also hitting you with a charge of $10-$25, so you are still coming out ahead.

Moral of the story: Keep enough in there where your checks won't bounce. And destroy that debit card. It is nothing but trouble if you don't know what you are doing with it.

[A. Pole]

Moral of the story: Keep enough in there where your checks won't bounce.

Why the new law allows banks to cheat?:

A new federal law that took effect last year dramatically reduced the amount of time for a check to clear, but the clearance time for deposits hasn't fallen commensurately.

[Tall_Texan]

2nd Moral of the story: Keep enough in your checking account where you don't have to wait for your deposited checks to post for the checks you write to clear. A good guideline would be to maintain a balance double the amount of your monthly rent/mortgage payment, assuming this is your highest monthly expense.

Yeah, saving up a little extra can be tough but it can be done - and it saves you the cost of check fees when you can least afford to have them.

[Petruchio]

Years ago I had a bank account where they processed the checks first, and hit you with NSF fees, then processed the nite-deposits.

I closed that account right quick!

[A. Pole]

Keep enough in your checking account where you don't have to wait for your deposited checks to post for the checks you write to clear.

So the purpose of the new law is to give banks free money.

[Alberta's Child]

One of the worst-kept secrets of banking is that the entire industry pretty much relies on irresponsible behavior of their customers as a major source of revenue.

I would recommend that everyone follow a general rule when it comes to maintaining a balance in my checking account: Figure out the amount of the largest check you write on a monthly basis, and do whatever it takes to make sure you have at least that much "extra" in your checking account -- just to provide some margin of safety when it comes to overdrafts.

[A. Pole]

One of the worst-kept secrets of banking is that the entire industry pretty much relies on irresponsible behavior of their customers as a major source of revenue.

This preying on irresponsibility or plain mistakes is only half of the story. The new law allows STEALING from the RESPONSIBLE customers by inducing them to keep the "extra margin" to compensate for the DISCREPANCY between the amount of time for a check to clear and the clearance time for deposits.

[Alberta's Child]

A new federal law that took effect last year dramatically reduced the amount of time for a check to clear, but the clearance time for deposits hasn't fallen commensurately.

Then change your bank. Many respectable institutions will immediately post deposits of payroll and government checks without waiting for these checks to clear.

[reformedliberal]

In my experience, if you have savings in the bank or credit union, the checks are covered w/no fee. It may be because I have had my accounts with the same institutions for decades and luckily have maintained good communication with the bank officers. I have an automatic distribution from an investment account (TUA) to a checking account at one institution (full service bank with a trust department). Often, the problems have been traced to the computer controlled distribution system. IIRC, accounts are coded so that if the customer has sufficient funds, this bank automatically covers the overdraft to a specified limit w/no fee and notifies the customer immediately, so that they can authorize a transfer from savings to checking. Mistakes happen and they are not always the fault of the customer.

Even under this system, I have learned to always keep a reserve equal to 2 months' distribution in the checking account. It also helps to not use ATMs if at all possible and to find the few seconds it takes to note any withdrawals so I am aware of the status of the account.

Since I pay a percentage fee to the trust department each month for their money management services, I would be quite upset if they charged me again for their mistakes, especially since they raised those fees during times when the economy was not doing well. There have been a couple of instances over the past 31 years where the distribution was not recorded properly and in each instance the bank was apologetic and accomodating. I have been lucky, as well, that I have had the same account executive for all that time. It probably also helps that I live in small town, rural America and my banking/savings history has been boringly consistent for all that time. When there is a glitch, I have always received a phone call from someone who realizes this is extremely unusual. The first time it happened, the alert person in charge checked back, found the problem and just let me know what had happened.

Perhaps I am just fortunate.

[StopThePress]

"Many respectable institutions will immediately post deposits of payroll and government checks without waiting for these checks to clear."

Actually, US Treasury Checks must be made immediately available per Regulation CC. Reg. CC also applies to State/Government checks, cash, direct deposit & wires.

[ninenot]

Actually, it's become a significant revenue item for banks.

They'll pay the OD for $30.00, and then charge another $30.00/day until a deposit is made to cover the OD (and all the resulting charges.)

You'd be AMAZED at how this piles up...

You may call that predatory--but what does it get you?

[ninenot]

Really? Back in the good old days, banks had to keep track of uncollected funds--which they were not allowed to invest. Usually the number was quite small as a % of deposits, but it was there, right in the DDA reports.

[ninenot]

The Banks have a very effective lobbying group in DC, and in all the States as well.

Banks are allowed to sell securities, annuities, run real-estate brokerages--all new profit-center services.

One may question whether these profit-centers have subtly allowed bankers to utilize less-strict credit standards, because the profits from the 'new' services have helped ameliorate Bank loan losses...

[ThinkDifferent]

My bank's automatic overdraft protection saved me what could have been a huge amount of trouble. I made a simple arithmetic error a few years ago when sending in my income tax payment (several thousand dollars), and wrote a check for more than was in my account. I realized it a few days later, and frantically tried to do an EFT from a money market fund to cover the difference, but it wasn't going to make it in time. I wasn't looking forward to finding out what the IRS would do when the check bounced, but instead the bank paid the check and dinged me $30, which I had absolutely no complaints about.

[ThinkDifferent]

And destroy that debit card. It is nothing but trouble if you don't know what you are doing with it.

Yeah, I fail to see any reason to use a debit card. Credit cards give you a monthly billing period, better fraud protection, and often rebates.