"Therefore the Kingdom of Heaven is like a certain king, who wanted to reconcile accounts with his servants. When he had begun to reconcile, one was brought to him who owed him ten thousand talents. But because he couldn't pay, his lord commanded him to be sold, with his wife, his children, and all that he had, and payment to be made. The servant therefore fell down and kneeled before him, saying, 'Lord, have patience with me, and I will repay you all!' The lord of that servant, being moved with compassion, released him, and forgave him the debt.
But that servant went out, and found one of his fellow servants, who owed him one hundred denarii, and he grabbed him, and took him by the throat, saying, 'Pay me what you owe!' "So his fellow servant fell down at his feet and begged him, saying, 'Have patience with me, and I will repay you!' He would not, but went and cast him into prison, until he should pay back that which was due. So when his fellow servants saw what was done, they were exceedingly sorry, and came and told to their lord all that was done. Then his lord called him in, and said to him, 'You wicked servant! I forgave you all that debt, because you begged me. Shouldn't you also have had mercy on your fellow servant, even as I had mercy on you?' His lord was angry, and delivered him to the tormentors, until he should pay all that was due to him." Matthew 18:23-35
I thought about this parable from the Gospel of Matthew as I closed my Bank of America account at the start of the New Year. I had a long-time checking account (for more than a decade) in which I had dutifully kept the $750 minimum balance to avoid a monthly maintenance fee. In December I received a statement that showed $14 missing. At that point I read more carefully the letter I had received from Bank of America on new fee structures. It explained that to avoid a $14 monthly fee I now needed a $1500 minimum balance. I did not like either choice-paying the $14 per month or adding another $750 to the minimum balance.
It is bad enough that the interest banks pay on deposited money is negligibly small. Now you must provide the bank with large amounts of free capital or your deposited money will be appropriated. Prior to the 2008 financial crisis, institutions such as Bank of America generated large amounts of revenue from usurious interest rates on credit cards and hefty fees for overdrafts and late payments. However, new laws forbidding some of the more egregious practices have sharply curtailed that revenue stream, so banks are instituting new fees to make up the difference.
I decided to shop for a new bank and I was struck by some advice given while conversing with a local businesswoman. "Never do business with a bank that has more than three branches. Banks with three or less branches are too small to be of much value to bigger banks, so there is little risk of a buyout." On hearing this advice, I remembered that I had never opened an account at Bank of America. I opened an account at a large regional bank that was bought by Bank of America. The same is true of another bank I do business with-M & T. I originally opened an account with First Maryland Bank, which was bought by All First, which then disintegrated in a currency trading scandal and was acquired by M & T.
I went to Farmers and Merchants, a small community bank with only three branches, all in northwest Baltimore County. They offered me totally free checking with no minimum balance. I opened a new account and the next day went to Bank of America and closed my account before any additional fees could be assessed.
There are, of course, some tradeoffs with switching to a small local bank. I can only visit the bank when I'm near my house, not anywhere in the country, which was the case with Bank of America. I can only have free use of an ATM machine at one of those three branches, anywhere else I have to pay a transaction fee. But, with proper planning and use of the Internet-even small banks offer online banking-these inconveniences should not be much of an issue. I have to ask myself, is $14 x 12 months, or $168 per year worth it for the additional accessibility Bank of America offers. I would never have the need to use ATMs far away from my house often enough to justify paying $168 per year to access Bank of America's nationwide ATM network. If I have to do that occasionally, I'll pay the $2 transaction fee.
When I closed my account at Bank of America, the manager noted that I had been a long-time customer and asked my reason. I told her that I was unhappy with the new fees being imposed. I said that it reminded me of the parable of the ungrateful servant. She didn't seem to understand the biblical reference. She handed me the cash for the remaining funds in my account and had me sign for it. No counter offer or apology for the new fee structure was made.
Bank of America and the other large banks created an unsustainable business model that generated revenue from high fees and usurious interest rates on high-risk loans. When the model failed they were shielded from the market consequences with billions of dollars in taxpayer bailouts on the condition that they end many of the practices that caused the failures. But it appears that rather than comply with the intentions of the new law, Bank of America is looking for loopholes in order to revive their old business model.
Of course, the large banks insist that even though they are exempt, all their customers should abide by the rules of the market place. That being the case, I think we the customers need to shop more for banking and ignore much of the slick marketing. We also need to overcome our inertia and be willing to change banks when market conditions change. It is easy to close an account and open a new one at another institution.
Ask yourself, if I were shopping for a bank today and considering all the available options, would I choose the bank that I currently have? If the answer to that question is no, then it is time to change banks. Look around and you will find many community banks and credit unions that offer excellent services at fair prices.
When I think about it, there is really no reason for Bank of America and its ilk to even be in business. In fact, if not for the billions of dollars in bad debt forgiven by the taxpayers, they would not be in business. But, Bank of America was not about to forgive the new fees they were imposing on me. It is time for customers to stop paying for all the lunacy and take their business elsewhere.
Showing posts with label banking fees. Show all posts
Showing posts with label banking fees. Show all posts
Thursday, March 10, 2011
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
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
Sunday, November 30, 2008
Credit Card Crisis Next?
The marketing of credit cards by banks has mystified me for years. How can banks shower the public with credit cards offers like confetti, charge usurious interest rates, tack on exorbitant fees and still have customers who are able to keep up with payments? The answer might be coming soon and it appears the answer will be—not forever. Speculation in financial news reports is that the subprime mortgage crisis will be followed by a credit card crisis.
A Reuters news story: “Looming credit card debt may be the next crisis” quotes John Whitehead, former chairman of Goldman Sachs Group, as saying that a credit card crisis is “waiting in the wings.” And a USA Today story “Why banks are boosting credit card interest rates and fees," quotes Gregory Larkin, a senior analyst at Innovest, as saying "Mortgages were simply the first storm to make landfall. Credit cards are next." According to Innovest, a research firm, by the end of 2009 banks are likely to write off 10% of credit card debt—a staggering $96 billion.
The aggressive marketing of consumer debt appears counter to the careful conservative image we generally have of loan officers and underwriters. After all, most people who loan money to friends and family members expect to be paid back. Are not banks in business to be paid back? Yet even individuals who have rung up tens of thousands of dollars in consumer debt are still inundated with new credit card offers.
So why are banks so intent on lending money to people with questionable means to pay it back? The answer in a word is—securitization. Just as they did with mortgages, banks have packaged and sold credit card debt in the form of securities to unwitting investors. The risk associated with the debt becomes some else’s problem. In the mean time if customers stay in debt, the bank can profit from hefty fees associated with managing the account.
It is actually more profitable for the banks if it customers are overloaded with debt. If a customer has too much debt to pay back in a reasonable period of time, he or she has no choice but to accept whatever additional fees and interest rate hikes the bank decides to levy. A further irony is that the inability of a customer to easily pay off the debt can be used as justification for imposing the additional fees and rate hikes.
Banks looking to make up for losses during the current financial crisis are finding that customers with outstanding credit card debt are easy targets. The USA Today story reported on consumers like Tommy Newsom who never missed a payment but had his credit card interest rate doubled to 27% for no apparent reason other than the law allowed the increase.
Banks justify sudden interest rate increases by claiming that a customer’s risk category has changed. A spokeswoman for Bank of America was quoted in the USA Today story has saying that the bank "regularly assesses the risk profile of accounts. If the bank decides to raise a customer's rate, it will notify the customer first and give him or her the chance to "opt out" and pay off the card balance at the existing rate.”
But notice the two-headed quarter in use in this statement. Customers whose “risk profile” have changed are most likely the ones identified as being unable to “opt out.” Without the means to pay off the balance the customer’s only option is to “accept” the new rate.
Banks can get away with this behavior because of loan agreements that are not agreements in the ordinary sense of the word. Credit card agreements contain language that allows the terms of the agreement to be changed by one party (the bank) at any time for any reason. The legality of such an agreement will never be tested in a court of law because consumers also sign away the right to sue. Only binding arbitration is permitted as means of resolving disputes in credit card agreements.
Of course the bank’s response to rising levels of credit card debt will accelerate the impending crisis rather than avert it. No need to worry though. More than likely customer paid tax-dollars will be sent to bailout the banks.
A Reuters news story: “Looming credit card debt may be the next crisis” quotes John Whitehead, former chairman of Goldman Sachs Group, as saying that a credit card crisis is “waiting in the wings.” And a USA Today story “Why banks are boosting credit card interest rates and fees," quotes Gregory Larkin, a senior analyst at Innovest, as saying "Mortgages were simply the first storm to make landfall. Credit cards are next." According to Innovest, a research firm, by the end of 2009 banks are likely to write off 10% of credit card debt—a staggering $96 billion.
The aggressive marketing of consumer debt appears counter to the careful conservative image we generally have of loan officers and underwriters. After all, most people who loan money to friends and family members expect to be paid back. Are not banks in business to be paid back? Yet even individuals who have rung up tens of thousands of dollars in consumer debt are still inundated with new credit card offers.
So why are banks so intent on lending money to people with questionable means to pay it back? The answer in a word is—securitization. Just as they did with mortgages, banks have packaged and sold credit card debt in the form of securities to unwitting investors. The risk associated with the debt becomes some else’s problem. In the mean time if customers stay in debt, the bank can profit from hefty fees associated with managing the account.
It is actually more profitable for the banks if it customers are overloaded with debt. If a customer has too much debt to pay back in a reasonable period of time, he or she has no choice but to accept whatever additional fees and interest rate hikes the bank decides to levy. A further irony is that the inability of a customer to easily pay off the debt can be used as justification for imposing the additional fees and rate hikes.
Banks looking to make up for losses during the current financial crisis are finding that customers with outstanding credit card debt are easy targets. The USA Today story reported on consumers like Tommy Newsom who never missed a payment but had his credit card interest rate doubled to 27% for no apparent reason other than the law allowed the increase.
Banks justify sudden interest rate increases by claiming that a customer’s risk category has changed. A spokeswoman for Bank of America was quoted in the USA Today story has saying that the bank "regularly assesses the risk profile of accounts. If the bank decides to raise a customer's rate, it will notify the customer first and give him or her the chance to "opt out" and pay off the card balance at the existing rate.”
But notice the two-headed quarter in use in this statement. Customers whose “risk profile” have changed are most likely the ones identified as being unable to “opt out.” Without the means to pay off the balance the customer’s only option is to “accept” the new rate.
Banks can get away with this behavior because of loan agreements that are not agreements in the ordinary sense of the word. Credit card agreements contain language that allows the terms of the agreement to be changed by one party (the bank) at any time for any reason. The legality of such an agreement will never be tested in a court of law because consumers also sign away the right to sue. Only binding arbitration is permitted as means of resolving disputes in credit card agreements.
Of course the bank’s response to rising levels of credit card debt will accelerate the impending crisis rather than avert it. No need to worry though. More than likely customer paid tax-dollars will be sent to bailout the banks.
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