Tuesday, February 09, 2010

Stop protecting irresponsible behavior

The Blade opines today that banks who charge you a fee for overdrawing your account are somehow 'discourteous.'

Personally, I fail to understand how a bank is being 'rude' in such circumstances.

Aren't YOU the one being rude for expecting the bank to cover your expenditure even though you have no money in your account?

The bank doesn't have to grant you this convenience - they could just expect you to know how much is in your account and never spend more than that.

Of course, that's expecting some level of personal responsibility from people who are driving, handling bills, raising children and probably voting.

According to the Consumer Federation of America, the typical debit card overdraft made by a customer is $20. But the typical penalty fee charged by big banks is $35, and it goes up exponentially the longer it is not paid.

GOOD!

This certainly seems reasonable to me. The idea of the overdraft charge is not to provide a short-term loan to individuals without the usual agreement between lender and borrower - it's provided as a true 'courtesy' by a supplier of a product to prevent you from facing embarrassment. The fee for the overdraft is to discourage you from overdrawing your account on a regular basis. And having the fee increase the longer it's not paid is just common sense!

Think about it: if you suffered no negative consequences for overdrafts, wouldn't you have more of them?

That's the point!

Your irresponsible behavior in spending more than you have is covered by the bank and they deserve to be compensated for the effort and the costs - and to be compensated in a way that discourages you from continuing to be irresponsible in the future.

I see nothing wrong with this.

But politicians - and the editorial board of The Blade - obviously do. They all must think people are idiots. They think these fees, which they describe as 'astronomical,' inappropriately 'cost you.' The fees do cost you, but they should!

Yet these same do-gooders, out to protect the stupid among us, fail to take into account how much the irresponsible behavior of the overdrawn customers inappropriately costs the banks - or the other depositors who don't overdraw their accounts.

Leftists on editorial boards and politicians in Washington, Columbus and One Government Center need to stop promoting feckless, immature and immoral behavior and stop passing laws designed to make others responsible for your bad decisions.

14 comments:

Tim Higgins said...

Maggie,

My belief is that you can connect the dots here between the practice of overdraft fees and the practice of payday loans. The battle has been won in limiting the practices of the latter, so why not now take the on the former as an equally egregious practice.

As for the Blade's position on this ... You have to question the comments of a business that seems unable to break even, let alone make a profit on businesses seeking to do so.

JohnW said...

I agree with you about the responsibility to not overdraw your account but you may not realize that banks program their computer systems to maximize their overdraft fees if you do. I know this because I work in the bank computer software industry and this functionality is always a requirement.

Most commonly they will set the program option to clear large dollar amounts first - followed by the smaller amounts maximizing the number of overdraft fees. Let’s say your account had 5 items post today - 1 for $300 and 4 for $75 - they would pay the $300 item and overdraft the 4 at $75 providing the same balance overdraft but achieving 4 overdraft fees of perhaps $35 each instead of 1. This is the part that I have a problem with - I think of it a gouging.

My 2 cents...

Maggie Thurber said...

JohnW - I must trust your statements about how this is done behind the scenes as I don't work in a bank and you say that you do.

However, I'll go back to the original point, with which you agree: if you don't overdraw your account, you don't have any of the fees or the internal programming to worry about.

Many banks also offer you the ability to have them automatically transfer funds from a savings account into a checking account if you should accidentally overdraw your account. That's another alternative to worrying about fees or the programming practices.

It's not gouging if you voluntarily (even if unwittingly) engage in an activity that results in the charges in the first place.

bobthedad said...

As a former bank employee I can't speak for all banks but I was told early in my career the thought process behind paying the largest checks first was to avoid returning mortgage and car payments. Yes, the policy also results in more overdraft fees but I would make the same choice as a consumer. I also had the authority to waive fees and would do so for occasional honest mistakes. During the budgeting process we didn't forecast increases in overdraft fees from year to year (unlike red light camera fees) and we even had a department that would monitor accounts that were overdrawn too often and close the accounts. We didn't want to have a reputation of catering to the type of customer that would paper the business community with bad checks. We clearly did not make policy to maximize income from overdraft fees.

Maybe we need to remind some people what happens when there are no consequences for writing checks for more than you have. Can you say "House Bank"?

StephenDraper said...

I think the overdraft fee imposts to checking accounts by traditional banks is tricky. There there seems to be some kind of alert to notify the customer if they are about to overspend. And the worst is, this overdraft fees are pretty expensive.

More and more people (60 million and counting according to this article from livingalmostlarge.com - Why not Have a Bank Account?) are not using banks for financial services needs.

Kadim said...

A couple years back I interviewed with what is now the largest bank in the US, for their Checking accounts division.

It was confirmed to me that overdrafts are a significant profit center, and they do structure certain elements of how accounts operate to maximize overdraft revenues.

One of the more egregious practices is to set up a new account so that overdrafting wasn't possible (for 3-6 months) so that, if a person tries a transaction that would overdraft, it'll be denied and result in no fee. Then, once they get accustomed to this, suddenly turn on overdrafting.

It's also been noted that turning off the overdrafting "courtesy" can be maddeningly difficult (though I believe this has changed recently.) The fact is, most people rather be embarrassed than pay such a heavy fee. (Just for kicks, I called one of my current banks, US Bank, to see if they'd honor the request. They said it hasn't bee implemented and may never be.)

And there is no doubt in my mind that the anti-payday lending laws were spurred on by banks, who were losing revenue to the payday lenders because payday loans are a great way of preventing overdraft fees for cheaper. (And if the payday lenders wanted to stay legal, all they need is a bank charter and to call payday fees "overdraft" fees as opposed to loan fees.)

In the end, I disagree that a $35 fee is reasonable for a $20 overdraft (depending of course on how quickly it gets paid.) And because of the way banks structure overdraft fees, you could cascade that $20 overdraft into $200 or more in fees.

And I believe most people agree that personal responsibility is important, but they also agree that the fees are out of line.

Banks haven't been getting that memo though, and have continued using overdraft fees as a profit center, treating their own customers in a way that is nothing short of contemptuous.

I never understood why any business would go out of its way to treat its customers so badly and be so inflexible. I have felt, for years now, that banks were slowly eroding their reputation with customers for their severity on fees.

The natural result of that is an angry populace wanting laws to rein in those fees and "punish" banks. So in my mind, the banks screwed themselves over. The politicians taking on the banks now are doing it because of anger against banks, and I think the banks deserve that anger due to their previous handling of customers.

Maggie Thurber said...

Stephen - why in the world should banks have to notify people if and when they're about to overspend? Why don't people already know that on their own?

The premise that banks should monitor all their clients' spending habits and balances is even more intrusive than people think the bank fees are!

The bank should never be responsible for making sure you don't spend more than you have in your account - that's YOUR job!

It's this sort of thinking that leads to politicians creating laws to protect people from their own stupidity - something no law can ever do.

In the meantime, people who don't act like idiots will have to pay the costs for those who do because banks will charge everyone more if they have incur the costs to protect stupid people from doing stupid things, while the government tells them how much they can't charge for such protection.

Do you not see just how wrong this is?

If people choose not to use banks, then that's their choice. But don't use the force of law to protect idiots because they have no idea how much money is in their account and don't want to pay for spending money they don't have.

Maggie Thurber said...

Kadim - the solution to not paying $35 for an overdraft of $20 is to not have an overdraft. Plain and simple.

If banks want to use their willingness to cover your lack of funds as a profit center, that's okay with me. I don't want to pay their fees for this 'service' so I don't spend more than is in my account.

I find it completely outrageous that anyone would argue in favor of limiting what a person can charge for a service that you do not have to accept.

Who gets to set the amount of the fees, then? The government? Like they understand what it's like to have to pay a penalty for spending more than they have in their bank account. How hypocritical!

And Kadim, I don't think it's comptemptuous for banks to charge people fees and make a profit - even on overdrafts. I go back to the original statement: if you don't like the fact that they charge you more than you want to pay for an overdraft, don't over draw your account!

The anger consumers are directing at the banks is severely misplaced. Rather than be mad that they banks charge for this, they should be mad at themselves for being stupid enough to not pay attention to how much money was in their account in the first place.

Maggie Thurber said...

Oh - and Kadim? These fees wouldn't be such a profit center if there weren't so many people relying upon the bank to cover their lack of funds in the first place.

Making it less costly for people to overdraw their accounts will only make overdrafts more prevalent. I say increase the fees and that will discourage people from making a bad decision.

Kadim said...

Maggie,

I (feel like I) know where you're coming from--many Americans have cultivated terrible financial habits. I'm horrified that so many people don't have savings accounts for rainy days or that they live so much on credit. There is this part of me that hopes that people would look at the high cost of those fees and would become better money managers.

Undoubtedly that does happen.

Hopefully.

Anyway, the banks have made a business decision to create a profit center from customer irresponsibility/incompetence. You're fine with that, and at some level I'm fine with that.

But like there are consequences of being irresponsible with your money, there are consequences for making business decisions. Banks chose to make a business decision which is arguably not particularly friendly to customers, so they should be prepared for the consequences. And one of those consequences is waking up one day and finding out that your customers hate you and are wanting to bring the long arm of the law against you. You might look at proposed laws as being a request to save people from their own stupidity, I see the laws as being a consequence of business decisions that the banks should have known would screw them over in the long run. These decisions are particularly egregious because many banks advertise themselves as being "safe" and good stewards of your money, and fail to make the footnote that they're safe just as long as you don't make any errors, in which case you'll be eaten alive.

Historically there were not that many laws that infringed on the ability to make any contract two people desired. Usury is an exception though, going back thousands of years. In fact, the bible has got more to say about how a person should manage other peoples' money than any other topic of personal habit other than prayer. I mention this because there is quite a long history of regulations in regards to holding people's money.

Maggie Thurber said...

Kadim...

I might agree with you that charging your customers high fees could be a 'bad' business practice - but it is only 'bad' for the irresponsible people.

The responsible ones (like me) don't want the basic fees of the bank raised to cover the cost of servicing some of the clients who have overdrafts.

You're looking at this only from the perspective that customers who overdraw are the only customers. There are far too many other customers (hopefully) who don't act in such an irresponsible manner.

If the bank cannot charge enough to prevent this bad behavior, then they will have to charge everyone more, even those who are not causing the costs. That means you and I and people like us who don't need such protection end up paying for those who do.

As for usury, I'm familiar with the biblical teachings. However, I would propose that covering overdraft charges is NOT part of managing other peoples' money, per se. The bank is giving a person money from its own assets (meaning yours and mine) to cover bad conduct. If there is any usury, it's in you and I not getting a portion of the fees collected for the use of our funds on deposit which allow the bad behavior to be covered.

There is more to this than just the people making bad decisions. There are costs to the responsible people who suffer as a result of the irresponsible.

Who is looking out for us? No one - they're too busy encouraging (through laws and policies) irresponsibility in others.

Maggie Thurber said...

John Stossel's column today is extremely pertinent to the discussion:

"If government relieves us of the responsibility of living by bailing us out, character will atrophy."

http://bit.ly/aLsq21

Kadim said...

Some banks may claim that the overdraft fees cross-subsidize lower fees for all bank accounts.

I admit that's a possibility, though given that credit unions have roughly similar basic account fees, but tend not to use overdraft fees as a profit center, I am not convinced that the banks need the cross-subsidy after all. (I used to bank at a credit union that didn't assess an overdraft fee for the first negative $10. I also hold accounts with Charles Schwab (whom I can't recommend highly enough, once you experience their level of customer service, you'll never go back to a regular bank) and I believe they cross-subsidize their accounts through brokerage fees (which I personally don't participate it, at least right now.))

Having said that, I wouldn't feel very comfortable using a bank knowing that my low fee account is cross-subsidized by less responsible account holders. While irresponsible/negligent/stupid/misinformed behavior plays a role in our economy, and has, undoubtedly, create much profit for some, I find that profiting off overdraft fees crosses a line for me.

Whereas other irresponsible behaviors have no particular relationship to wealth, overdraft fees only hit the poor and struggling simply because it's harder to balance one's account when there isn't much in it. I can't justify the cascade of severe consequences, which are too punitive and not particularly corrective. I'd rather just pay the fees or bank elsewhere. (Note: I feel this way because I've watched too many friends be burned by banks.)

Maggie Thurber said...

Kadim - I applaud you for using your power of choice in the free market, as well as your personal recommendations to encourage people to use products you believe in.

But I believe there may be a misunderstanding. I don't expect that overdraft fees offset my current fees on my accounts. I expect the bank to charge me a fair price for those services - a price I'm willing to pay.

What I don't want is for the government to dictate what the fees will be for certain transactions (meaning to lower them) which will then result in everyone else's fees going up to cover the loss.

In my mind, there's a difference.

And while I can sympathize with poorer individuals who often don't have a lot of money in their account, I can remember when I was in that situation. Having a lesser amount of money than others does not mean you get special dispensation when it comes to your personal responsibility to balance your accounts and not spend more than you have.

We come back to the original point: if the government orders the banks to make it less expensive to overdraft your account, more people will do it - and more often. The actions to limit what a provider can charge for a service will promote the irresponsible behavior.

Government needs to stop doing that!

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