Stopping the Pigs at the Trough

Posted by Ray on August 20, 2009 under Main | Be the First to Comment

The banking system has systematically taken advantage of the people whom they are supposed to serve. They either made very bad loans which have led to the foreclosures of many properties to charging excessive overdraft fees, which is my gripe. According to a report last month banks collected a record $38B in overdraft fees.

In full disclosure, I have had my fair share of overdraft fees this year and am admittedly against them. The banking system has changed to trap individuals through fees on their debit cards which explain the steep rise in fees collected as more Americans dump cash for plastic to access their money. A consumer cannot opt out of the ‘overdraft protection’ which is more like a license to steal from its depositors. I am not saying that people who overdraft their accounts not be punished somehow, but I am saying enough is enough with the current practice.

Here is how your bank maximizes their overdraft fees. Most banks run transactions from largest to smallest which maximize your costs if you bounce something versus running transactions from smallest to largest which would be much fairer. You may think, big deal, but it is to the tune of $38B a year in fee and no one can opt out of the ‘overdraft protection’ which technically is not overdraft.

Here is how it works, if you have $100 in your account and use your debit card to purchase $30, $10, and $75 your bank will debit largest to smallest which would cause the person to incur 2 overdraft charges at $35 a pop. So, in this case your account would be overdrawn $85 because they went largest to smallest.

However, if your bank has a conscience, haha, they will run transactions smallest to largest which mean you would incur, using the same example as above, 1 overdraft charge. So instead of your account being negative $85 you would be overdrawn by only $50. The bank clears all the transactions knowing that your account is overdrawn and you will incur fees, but they do it anyhow.

The banks claim that using the largest to smallest method of clearing transactions is more useful because a larger payment could be a mortgage payment in a foreclosure situation. That sounds all fine and dandy I mean hey they want people to stay in their house and the explanation sounds reasonable, right? Wrong. Remember, I said the bank will clear all the transactions, remember? That means regardless of how the transactions clear largest to smallest or visa versa all the transactions will clear.

Therefore, one must conclude that banks thought long and hard about how this system works, gaming the system in their favor. Worst of all this punishes people living paycheck to paycheck and the poor, 90% of all these fees come from the poorest bank customers, i.e. the least profitable until they use their debit card. Now, the least profitable customer becomes one of the most profitable customers which is why banks give away nice things to open up a free checking account.

Remember, I said people, me included, need to pay fees when we mess up, but banks can still collect fees doing it in a fair way to its customers. Not all banks do what I am talking about, but most banks do it which adds insult to injury as the banks take billions in federal aid and then charge the very people who bailed them out, through their taxes, and gouge them like this.

Ultimately, this system is unfair because of one reason, you and I cannot opt out of it. If we could opt out of it then I will let them have their nice and profitable system, but that is not the case. There is good news, Congress is trying to enact new regulations making this practice illegal if it there is not opt-out privilege. I suggest you contact your representatives in support of this measure, unless you hate poor people or like banks continuing to bilk billions out of all of us through admittedly unfair practices.