“Banking” Archive
Apr
23
I’m not a huge fan of banks, but I have accepted them as a necessarily financial evil. That said, about a month ago I was hit with two overdraft fees in my checking account. This turned out to be the bank’s fault–they hadn’t linked my savings account properly–and I was refunded my $70 in fees within one business day. So, no harm no foul, right? Yes and no. Upon further investigation I uncovered a nasty little trick banks like to play in order to increase their fee income. Here is how is works:
- Let’s assume you have $150 in your checking account
- You perform a debit transaction for $5.00 on Day X, which will clear on Day Y
- You write a check for $155 on Day X, which will also clear on Day Y
Given this scenario, how may overdraft fees would you expect to pay? How many does the bank charge you for?
Common sense would dictate that if two items were to clear on the same day, the bank would clear the item that is fully covered–in this case the $5 debit charge–and then process the item that sends you into ‘The Overdraft Zone’. I would posit this is a fair assumption to make, but clearly the banks disagree with me.
Here is what actually happened to me. Again, keep in mind this wasn’t supposed to happen because of my supposedly linked savings account, so my discovery is rather unfortunate from the perspective of my bank. I would never have noticed this has I not asked for an explanation.
So, with $150 in the bank, the check I wrote for $155 clears, bringing my balance to ($5.00) and thus incurring a $35.00 overdraft fee. Next, comes the $5 debit, which brings my balance to ($45.00), including the first overdraft fee. Hold on, the bank isn’t done yet! The $5.00 did indeed bring me further into a negative balance, generating another $35 overdraft fee, bringing my balance to ($80). Ouch! All that for technically going $5 in the hole.
So what should have happened. Here is what I would expect:
- Bank clears my $5.00 debit charge first, bringing my balance to $145.00
- Bank clears my $150 check next, bringing my balance to ($5.00)
- Bank charges me $35 overdraft fee, bringing my balance to ($40)
See the difference? By selectively paying the larger item first, I was put into an overdraft situation right way, so the $5.00 debit initiates a second overdraft fee, a result that is avoided if the bank were to follow the scenario I would expect.
Can banks get away with this? As far as I can tell, this isn’t illegal but I would argue that it is clearly done in bad faith. If this happens to you, don’t hesitate to contact your bank, threatening to switch banks if necessary.
UPDATE: My math is horrible without Excel these days. I realize that my balance in the scenario that the bank liked, would be ($80) not ($70) as I previously had. Luckily nobody wrote me to point that out. I found that little number on my own.
Apr
22
One of my readers (and I have several now) pointed out to me that his bank is very aggressive in trying to sell him on all sorts of financial products from mutual funds, insurance, brokerage accounts, life insurance and other, typically fee based or referral fee based products. I’ve heard the argument made by banks that they would like to become a ‘one-stop shop’ in terms of meeting the financial needs of their customers, but is this the true motivator behind this aggressive push?
I would argue the answer is no. Many banks, particularly the larger banks like WAMU, BofA, Wachovia, Wells Fargo, and US Bank to name a few, make a substantial portion of their revenue from non-interest related fee income. The largest component of this is far away the fees we all end up paying for bounced checks, overdrafts etc. Increasingly, however, banks are generating fee income from trying to sell you other products that you may or may not need. I’ve overheard stories on Bob Brinker’s Moneytalk radio show, where older and less savvy bank customers have been duped into buying high load or high commission mutual funds that only fatten the pockets of those at the bank. Clearly this is a trend that will continue as banks come to rely more heavily on fee income as a source of revenue.
My advice, if you get a ‘cold call’ from your bank offering to sell you financial products you don’t need/want is to ask them to put you on the bank’s “do not call” list. Not sure how things might work legally since your bank is someone you have an established business relationship with, but further threatening to close the account should you get any further solicitations usually does the trick.
Has anyone out there encountered this situation?
Apr
20
I have very little loyalty to banks and will typically switch banks when a better deal comes my way. For the past 18 months, I have had an account with Bank of America, where I have enjoyed one Alaska Airlines Mileage Plan Mile for every $2 I spent using my debit card. In addition, I had a linked savings account that was earning a very meager 0.15% APY. As I evaluate my financial situation and try to keep my money in a place where I might get something in return, I’ve decided to switch my account to Washington Mutual.
Washington Mutual currently has a great offering when you open a checking account and savings account together, online. The WAMU Free Checking account requires only $1 to open and there are no fees, even if you don’t do direct deposit. Now, the Statement Savings Account, when opened seperately from the WAMU Free Checking account, only earns a 0.25% APY. If opened online, together with the WAMU Free Checking, you will enjoy a very nice 5.00% APY. You can schedule regular investments into the savings account from your linked checking account if you so desire.
In addition, if you choose to get a debit card for your checking account, you will earn $0.03 on every debit card, non-pin transaction, up to $250 per year. Not bad to get paid to do nothing other than use your debit card. I’m already a fairly cashless operator–I’ve shredded all my credit cards–so getting a reward for using my debit card is much like getting something for nothing.
For those of you with access to Washington Mutual, I highly recommend signing up for this account combination.
