Fresh Finance: Debit Card Robbery

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Debit Card Robbery

My bank has always had an interesting way of deciding in which order to arrange my charges and deposits to my bank account.  I always thought it only made sense things would fall in line the order in which they happened.  This isn’t always the case.  Either way, I normally don’t fret but sometimes, deposits would get credited days later or would show in the account but not in the “available” column.  I never paid it much attention until the time I would notice my account balance was negative and I had been assessed an overdraft charge or two or three all in the same day.

If I was lucky, I would be able to get the overdraft fees reversed because of a bank error or my simply overlooking my current balance and not realizing the account was close to the brink.  What can I say? Money seems to go a lot faster when you are using debit instead of cash.  Either way, I never thought about how much the banking industry is making off of people who have made similar mistakes until recently.  This year alone, the banking industry is expected to make $27 billion just from covering overdrafts on debit card purchases linked to checking accounts.

What is an overdraft Fee?

An overdraft fee is a fee incurred when you make a purchase using your debit card causing your current account balance to go into the red.  The purchase forces your account into a negative balance.  Logic begs the question, how can I pay for something if I don’t have enough money in my bank account to cover the bill?  Well, that’s where overdraft protection comes in.  When you open up a bank account, most banks automatically enroll you into what they call overdraft protection.  Overdraft protection, in my opinion, is just the banks’ way of saying “O, you’re in a tight spot, sure I’ll loan you a few bucks… but there’s a fee for that.”  Have you ever been strapped for cash or used one of your debit cards to purchase something only to realize later that you went over your balance by .45 cents?  What’s even worse, the bank is charging you $25.00 to cover the .45 cent loan?  I’ll admit, it happened to me several times during my college days and I felt like I got robbed each time.

Then there is the question of billing order.

Have you ever noticed transactions show up in a different order when you check your account online?  For example, say you bought five separate items today using your debit card and all five of them were for different amounts.  By the time you got home, the order in which you actually purchased the items shows up completely out of sequence in your check register.  What’s even weirder is the fact the transaction order is completely different the following day.  Most of the time, your account balance is high enough to cover any purchases but it’s the one time it’s not that breaks the bank.

Many critics accuse banks of rearranging the order of transactions in a way that multiplies the fees and causes the account holder to overdraft several times at once.  They arrange the largest purchase first and the smallest purchase last.  This is a huge difference especially if you have a deposit pending to cover the larger expenses.  Have you ever noticed this with your own bank account?

So why don’t you just opt-out of overdraft protection?

It’s not so easy!  In fact, it’s almost impossible.  There is little regulation against industry practices.  Most banks require you to be signed up if you have a debit card linked to your checking account.  Plus, they have little incentive to let you opt-out.  According to some economist, 45% of the nation’s banks and credit unions collect more from overdraft services than they make in profits.  What company is going to let you starve their cash cow by opting out and starving the cow to death? Even if you could, would you really want to opt-out?  Think about it, you’re out buying groceries for the family and your debit card gets rejected.  The line behind you is getting longer and your stuck standing there trying to figure out what happened to the $500 check you just deposited.  Who really wants to be caught in that situation? The only protection overdraft protection provides is the protection from embarrassment at the counter from a rejected card transaction.  Is $25 each occurrence really worth the rejection?  You be the judge.

What about industry regulation?

A.T.M. card usage is nothing new.  People have been using plastic to access cash for decades.  It wasn’t until A.T.M. cards started using MasterCard and Visa logos and allowing cardholders to debit cash at the point of sale that problems started to arise.  A new market niche sprang up which required new programs and new legislation.  However, the legislation has been slow to adapt to protect consumer needs.  Many advocacy groups say banks are making a killing because consumers are unaware of the high costs of overdraft services.  According to an F.D.I.C. study, a $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520 percent.  By contrast, penalty interest rates on credit cards usually run around 30 percent.

The Federal Reserve is “considering” a couple of measures to help inform the consumer and protect our rights.  A couple of the measures include:

• Requiring banks to get permission from consumers before enrolling them in overdraft programs, so that consumers are not caught unaware at the cash register.

• In 2005, they ruled that overdraft charges should not be covered by the Truth in Lending Act which meant bankers did not have to get consumers’ permission to sign them up, nor did they have to disclose interest rate information for the fees.

• Instead, they issued a list of “best practices” that asked banks to allow customers to opt out of overdraft programs, provide an alert when a purchase would push the account below zero, and more clearly disclose overdraft fees.

There is a lot at stake and the Federal Reserve has faltered some under industry pressure.  They are now considering more regulations to tackle abusive practices but still have yet to do so.  They are not the only one to take notice of the threats the industry presents.  Rep Carolyn Maloney, Dem of NY, is advocating for legislation that would require warnings when a debit card purchase will overdraw an account and also bar banks from running the most expensive purchases through accounts first.  Hopefully, the wave will catch on as did credit card legislation signed into law earlier this year.

Ultimately, it is your responsibility to keep track of how much money you have in any account that you own. Don’t leave it up to legislation and industry advocates to protect your rights or your wallet.  Take added precautions to avoid giving the banks any more of your money and don’t be duped by the advertisements saying they are actually doing you a favor by offering the service in the first place.  Any thoughts?

Article by Kevin Breckenridge

Helping to raise the financial conscious of those who are consciously aware of the necessity to obtain financial freedom. Through education, exposure, open discussion, and action we can eliminate the financial strain on our pockets. Doing so will allow us to build the capital and asset portfolio necessary to truly enjoy our life as well as elevate the launching pad for our future generations. Follow me on Twitter @Legacieinmotion

Kevin has written 32 article(s) for us.