Sunday, September 27, 2009

Debit Card Deceits: When Zero Isn't The Floor

Debit cards have become a popular alternative to credit cards because they have many of the conveniences of credit cards without actual debt. I have come to rely more and more on my debit card because I don't have to carry a checkbook and hold up checkout lines with identification hassles every time I write a check. I simply swipe the card and go on my way. Money is deducted directly from my checking account, just as if I wrote a check. Once I deplete my checking account balance, the card stays in my wallet until the next payday. It appears to be a full proof system for staying out of debt.

However, appearances can be deceiving because the belief that you can't get into debt using a debit card is based on a false assumption. Account holders naturally assume that once the balance is zero, transactions will be declined. The reality is banks will process the transaction even if the money is not in the account and then assess hefty overdraft fees. The account holder becomes liable for the purchase, the overdraft fee, and any additional fees that the bank dreams up.

My teenage daughter had a recent run-in with debit card fees. She does not have a credit card, but she has a checking account at M &T Bank with a debit/ATM card, and a job with direct deposit for her paychecks. Like many consumers, she believed that a debit card protected her from ever spending more than the balance in her account. However, a couple of small purchases during a night out with friends unleashed a cascading series of bank charges put the balance on her account hopelessly below zero.

At a local eatery she bought a sandwich for $8 and then moved across the street to the local coffee shop where she made a $4 purchase. She thought her checking account balance was low, but each transaction on her debit card was approved. What she didn't realize is that because she did not have the money to cover either purchase, each transaction triggered a $35 overdraft fee. Checking her account online the next day, revealed that she was now more than $70 below zero. She thought the problem would be solved in a few days when her paycheck for $90 would be posted.

However, that was another false assumption. M&T's fee structure imposed a $10 charge everyday that the account remained below zero. By the time the $90 arrived she was more than $100 in the red and counting. Her paycheck vanished and the $10 daily charges continued. The next $90 paycheck would be in two weeks. It had become mathematically impossible for her get out of debt.

After learning all this, I understand why payday loan operations continue to thrive despite their exorbitant fees. In some circumstances, a payday loan is a much better deal compared to a bank. For low-income people with small balances, a simple math error made while shopping can cause unrecoverable financial harm if a bank is involved.

Because my daughter wanted to be responsible for her own finances, she avoided telling me what was happening. I found out by accident, when coincidentally, another problem occurred with her account that prompted the bank to call, and I answered the phone. Someone had obtained access to her debit card number and was making fraudulent purchases. These transactions, totaling hundreds of dollars for purchases in places outside the United States, had not been declined either. But the bank's monitoring systems had flagged them as suspicious and called to verify their authenticity.

We had to visit the bank and fill out paperwork certifying that the transactions were indeed fraudulent so that the charges could be reversed. By the time we arrived, the fraudulent purchases, multiple overdraft fees, and daily charges had resulted in a checking account balance that was close to $1500 below zero.

I asked the M&T bank manager: "At what point does the balance get so far below zero that transactions are declined?" Interestingly, he did not have an exact answer to that question. He indicated that there are limits, but that the limits are not hard and fast. From his point-of-view, the bank was doing a favor by allowing purchases to go through even if no money was in the account to cover them. Of course, it is an unasked favor, for which the bank is charging fees that are often far greater than the purchase amounts in question.

On reflection, I found the bank's priorities deeply unsettling. After all, M&T had asked us to come in, but it was the suspicious pattern of activity that triggered the phone call, not the negative balance. A $4 purchase at a local coffee shop that resulted in hundreds of dollars in fees is part of the bank's business model. A $300 purchase for tickets to a Canadian amusement park that my daughter couldn't possibly have made, is a threat to the bank's business model. The latter event triggered a phone call from the bank; the former event did not concern them. The bank had no moral qualms about appropriating my daughter's entire paycheck for a $4 coffee purchase, but acted outraged by someone taking money from the bank.

After reversing all the fraud, we still had the negative balanced caused by the fees associated with the legitimate purchases. I managed to negotiate reversals for all but the first overdraft fee. That restored her account balance to a positive number and eliminated the daily $10 charges.

However, I found agreeing to even one overdraft fee a distasteful compromise given that my daughter never agreed to overdraft protection in the first place. In fact, not only do banks provide an expensive service that is not always wanted, but they also deceive customers further by re-ordering transactions to maximize fees. Suppose you went shopping with $100 in your account and made purchases of $4, $6, $8, and $102 in that order. You might think that the $102 purchase at the end would trigger a $35 overdraft fee because you had a large enough balance to cover the first three purchases. But, at the end of the day the bank would assess $140 in fees by re-ordering the purchases. It would process the largest purchase first as an overdraft, followed by the other three small purchases all as overdrafts.

These practices might be changing because Congress is debating new legislation that would require banks to get your permission before setting up your account with expensive overdraft protection. Consumers are also fighting back. Eileen Ambrose reported in The Baltimore Sun that Maxine Given of Baltimore County, sued M&T Bank, claiming the bank's overdraft program violates Maryland's consumer protection laws. And, as Bob Sullivan reported in his Red Tape Chronicles, consumers are leveraging the power of social media online to publicly embarrass and shame the shady practices of many banks. Let's hope Congress gets the message and enacts meaningful consumer protections.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy


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