Hacker News Reader

Comment by kkielhofner | Hacker News Reader

There's yet another credit score type system that has significant effects on the ability to participate in the financial system that's much less known:

https://www.investopedia.com/what-to-know-and-do-if-you-re-l...

It's known (quite infamously) to essentially keep unbanked populations unbanked. Long story short if you've had overdraft fees, bounced checks, etc opening new accounts at banks that utilize ChexSystems becomes nearly impossible.

On one hand there have clearly been people that have taken advantage of banks being siloed and abuse overdraft protection, etc to essentially get loans they can knowingly abscond with. Just move on to another bank. Repeat.

On the other hand, ChexSystems is much less well known and a bit more "shadowy". The old story of "I use my debit card, mismanage my activity against direct deposit/balance, get hit with overdraft, then overdraft again once the fee hits, etc and next thing I know I'm $500 in the hole because of a $2.50 debit at a convenience store and now I'm essentially banned from every bank."

In the case of the debit card example (or credit cards) banks could do what they used to and actually decline the charge. However they've clearly figured out it's much more profitable to allow the charge and just hit people with (often excessive) overdraft and over credit limit fees.

View on HN

> In the case of the debit card example (or credit cards) banks could do what they used to and actually decline the charge.

I use citibank and they've recently announced that they're going back to the old ways of just declining the charge, and eliminating overdraft fees. Hopefully that's a trend that other banks are also following.

I prefer the way banks do it here: you don't pay an overdraft fee, nor are you denied (unless you have a non-fixed income). Instead, it's treated like credit and you pay a low percentage at the end of the quarter/year depending on how long you stayed negative. I can't remember the numbers exactly but I've paid at most around 20 Euro after having gone -1000 for more than a month.

Most US banks and credit unions offer a similar service, called an "overdraft line of credit." Overall I think it provides the best experience for the customer, but there are a few issues. You have to know about it and apply for it. You need a good enough credit score and/or regular income to qualify. And many of the people who currently lose money to overdraft fees would probably just max out their line of credit (commonly $1,000) and then continue to overdraft while also paying $80/year or whatever in interest.

A hybrid approach is the best way to go, IMO.

Like...allow up to $500 to be overdrafted with interest being charged. If you reach $500 in overdraft, then decline any further charges.

Not spending more than you have is the best way to go.

Sometimes you have much more, just in a different account.

Why not just use a credit card?

If you were going to phrase that the way most (inflammatory) articles talk about short term loans (like payday), you could instead say that you were charged 26% APY.

seems like an awful lot of risk for a bank, unless they can see you have the money in another account you hold with them. Still, you're essentially treating your checking account as a credit card yet they are giving you almost no interest rate instead of the 20% seen on credit cards? Seems fishy

I maybe should have mentioned that we also have direct deposit here for pretty much everything i.e. the bank knows where you're employed and how much income you make per month. I've heard from e.g. students without permanent jobs that they don't usually get this perk (anymore). But yes, it's essentially a credit card with very low interest rates, although I have a credit card as well and the debt is automatically deducted from my bank account at the end of the (CC billing) month. There is also a section in the online banking to view CC transactions even though it's a separate entity from the bank, so any changes to e.g. region locking, limits, etc. must be done via the CC website.

This (the bank knows where you're employed and how much income you make) is only possible with one account per person, right?

In the US people that do direct deposit are also treated differently by the banks. Both on the surface, i.e. you get better interest rates, and under the hood (fraud models adjusted).

With Chase you can choose if you want them to do this or to overdraft and charge you a fee. By default overdraft protect is off, so charges are just rejected.

That's good that it's default to decline. It wasn't always that way. In fact, overdraft protection used to be the mandatory and only option.

The reason that you have an option is actually not because of Chase's goodwill, but due to an Obama-era law that requires banks allow end users to turn off overdraft protection: https://www.cbsnews.com/news/obama-signs-sweeping-financial-...

There are some unfortunate and annoying loopholes. In particular, if you have a recurring, subscription based fee (instead of a typical debit card transaction) they can and still will charge you overdraft fees for that.

That's great news. We can only hope that with awareness and competition that once again becomes the standard!

Pretty much every US bank allows account holders to disable overdraft protection for checks and debit cards. It's just a question of whether that account feature is on or off by default. Most banks used to turn it on by default, perhaps motivated by the overdraft fees. Now industry practice is shifting and more banks are disabling it by default.

I prefer to have overdraft protection turned on. I usually keep very little money in my checking account and transfer any excess to other accounts. But a couple of times I screwed up the timing (my own fault). Paying my bank an overdraft fee was a lot better than bouncing a check.

> I use citibank and they've recently announced that they're going back to the old ways of just declining the charge, and eliminating overdraft fees. Hopefully that's a trend that other banks are also following.

I have to wonder what the incentive is for them to go back to that instead of easy profit

Could be good marketing/competitive advantage.

Regulatory fear.

Solution: go to a local credit union (not a bank) and ask to speak to a manager. Explain your situation and that you want to fix it but can't.

Many credit unions can open a no-frills checking account as essentially a probationary account for you that you can convert into whatever you want after a few months of good history.

Source: I used to work at a credit union and we did this for people all the time.

How about a solution to the structural problem?

This isn’t my domain, but just spitballing, we could use public funds to advertise credit unions in low income neighborhoods. Would credit unions want this, or would it lead to harmful consequences? Another way of asking this is, how come credit unions take these customers that banks won’t?

Postal banking would be a good solution. It would allow the post office to offer basic banking services for folks like this that can't access it at commercial institutions.

You need to allow everyone to do banking via this resource and they should also want to use it as a bank. Otherwise you'll run into a situation where that bank is associated with risky customers and is thus treated based on that reputation.

Don’t let the perfect be the enemy of the good/better.

If USPS banking helps the unbanked by only 50 units of help instead of a maximum of 100, it’s still a 50 point improvement. If Morgan Stanley or JPMorgan can offer me a better banking deal than the post office could, that’s no reason to not have the post office offer banking.

I agree it should be open to everyone, but don’t agree that there can be a maximum of zero-point-zero difference in customer base vs other banks.

Yeah, I did not mean to imply that postal banking would just be for high-risk customers. There are no postal banking plans where that's a restriction – everyone would have access to it, including many who are too far from a bank to have regular access. The post office is the government's widest reaching physical presence in this country with more locations than any other part of government, so it makes sense that this would be an inroad into banking for lots of people.

Easy, give every SSN a corresponding USPS/public bank account

I just love this narrative that someone who has lived their whole life with a fraught relationship with banks, overdrafting regularly, having trouble keeping their life in order, etc. will suddenly have the organization and forethought to walk into a bank, ask to speak with a manager, and be able to credibly promise that they want to fix this relationship.

I'm not saying people can't change, but it's naive as hell to think that they will on a dime such as you suggest.

It's not a narrative, it's my life experience. I saw it first hand, many times, which is why I commented.

Sadly, there are many who will not become more responsible with time. But there are also many who will, and I'm glad to have been able to play the smallest role in helping people who genuinely want a fresh start.

Sorry I didn't mean to suggest what you had said didn't happen, I very much believe you that people came in and said those words.

What I have a harder time believing, and not just in this situation but in a lot of conversations about the unbanked, is that these people will, after a lifetime of having problems with the banking system, suddenly "see the light" and start behaving in ways that are compatible with that same banking system.

This "fresh start" seems like the bad narrative, to me. I believe people seek it, and I believe they're hopeful about it, but I don't believe it's realistic to just assume. I definitely want to live in a world where people can choose to change, but suggesting that they actually will do that is, to me, not realistic.

I feel like a more effective approach would be to change how the banking system works, but I imagine that comes with a myriad of undesirable costs.

> I feel like a more effective approach would be to change how the banking system works, but I imagine that comes with a myriad of undesirable costs.

It seems likely to me that people who can't navigate the current banking system at a basic level would struggle with any banking system you introduce.

Or just any system in general.

This is very "fixed" mindset you're applying to others. Some portion of the populace grows up every year. There should be a path to re/build your life once that happens.

Also these institutions have protocols set up so as not to be able to see any “manager” at a given location. Hell in New York, it seems that a lot of inner city brick and mortar banking locations are becoming atm kiosks with maybe 1 or 2 employees there… not as tellers but instead to help with using the atms.

That would be because they have so many locations. You could walk down the street and around the corner to find another one.

Or are you saying that a bank manager is actually hard to find in NYC?

NYC isn’t only manhattan island

Ironically, I’ve seen “kiosks-only” at one bank branch in the Bay Area, and it was a local credit union.

Well if they can't get their shit together long enough to do something like that then this credit score system for checking accounts sounds perfectly reasonable to me.

I've been thinking about this a lot, and I think this is a good example of how we could do better as a society; some people who can't get checking accounts definitely can't handle the responsibility. Most of these people however, handle responsibility 10x as complex as this on a regular basis, and something is missing, either in a lack of shared cultural values (a lot of the unbanked are foreigners I think), or a lack of understanding of consequences (how many times have you heard the "I didn't know I'd fall down this well of overdraft fees"?).

In other words, the people involved usually are trustworthy in a generic "is it safe to bank with them", they're just not plugging into the system in a way that fits the defaults.

I'd almost argue that the banking system ought to be more flexible to maximize its compatibility with as many people as possible, and thus far hasn't because of the drive to maximize certainty and minimize all forms of risk.

I have no answers or real solid ideas for how to do this, but "it's all on them" doesn't quite feel right. These are (mostly) good people who will pay you back if you lend them money, and that should matter!

I think my comment got construed as "people can't change so it's all their fault" and I meant it more as, "financial systems should be willing to move closer to where these people are already at, and stop demanding these people make all the changes."

I also don't know how feasible that is, so... IDK! Just thinking via writing, I guess.

Thanks for being a realist! I was thinking the same thing.

I'm apt to be that cynical as well, but if what the original commenter said is true, that provides me with a little hope.

It's so easy to slip through the cracks in the system, so to speak. A sudden medical bill or car problems, for instance. I realized on my drive to work today that my car is the only thing keeping me from poverty. Luckily, I have tools in the back and would probably be able to fix it myself. :) Also, once you're in it, you're in it, and it's a strong cycle. You don't always have the luxury of things we often take for granted like having a nice outfit to wear, reliable transportation to an interview, and finally not even having a mailing address if you even end up getting a job offer.

It's like the places that offer a free shower and "nice" outfit (for an interview) to homeless people. Sometimes all it takes is that little boost to get (to be sure, the right person with the right attitude) someone back on their feet.

I've luckily never been in that situation, but I can empathize and understand how a completely ordinary person could quickly end up there.

I have personally implemented this product for several financial institutions.

In my experience, many are simply doing it as a form of KYC (i.e. customer authentication) than an actual "is this a bad customer" check.

I have seen some really janky shit too. Every FI I have ever worked with ultimately decided to implement some "exception" process to be able to work with customers when there is some system outage or other unexpected results come back.

Additionally, every institution I worked with also provides some form of second-chance product offerings to customers who come back with a red-hot report. Obviously, these products do not offer overdraft or other line-of-credit features, but they are real checking accounts for all other purposes.

From my perspective, it's not an ideal system. But then again, I don't know that ideal is possible or desired. I think if Chex didn't exist, something else certainly would take its place. I've watched some other vendors exit the space recently, so I think they are now the last/biggest player.

You sound like you're not sure that what you implemented was good for anyone.

If you are implying there is some sort of ethical harm in undertaking this kind of work, I can assure you the thought was crossing my mind the entire time. My choices were ultimately:

1. Implement this product as specified, doing everything in my power to ensure rules are being followed throughout.

2. Quit my job in protest, bringing down my tiny startup company. 10 people are immediately out of work. Our client finds someone else to implement chex for them anyways.

I do consider the ethical implications, of which there are many.

I think we are coding ourselves into dystopia - where technology will not be serving us, but we will be serving it. We might be there already.

Which 'governance structure'/'rule creating structure' is going to ensure that the moral elements are considered? Or do they simple wave through the legislation big corporations' lobbyists have written? Will big corporations' so-called the 'ethics committees' give us the moral outlook we need? (I don't think so - they are about justifying the unjustifiable, it seems to me.) What is better - that 10 people you are out of work, or that - as you say - someone else will implement this?

These questions are very hard to answer. There are lots of coders who will do whatever-it-is without hesitation.

Ultimately, I guess we will have to do as we each see fit. What I say: morality is a question for the individual, so how do you judge yourself? That is one way to guide oneself through the mire.

FWIW, I just submitted a link on morality with regards to software:

https://news.ycombinator.com/item?id=31517222

I wonder if this is statistical discrimination.

Like in theory, someone who closes an account $2.50 in the negative does very little damage to the bank directly. The $2.50 is a small fraction of the annual overhead of the bank account.

Yet these behaviors are highly correlative of unprofitable checking customers. The entire checking account model seems to be based on whales that return the bulk of the profits. If you sneeze wrong, your statistically 10x less likely to ever become that whale.

From a profit maximizing POV, it totally makes sense for banks to do this. But from a "banks are a basic utility" point of view, it doesn't seem to make sense.

Why must profitability to a banker matter to public optimization of agency? If anything the banker just becomes a thought policing grifter who empowers agency of some without any oversight.

A banker is nothing more than a fallible human. Why record in my inner monologue they’re to be seen as more than that?

Prior to open discourse online, public relations teams did a stellar job convincing people financiers are special. I’ve been in the room with people that attend Davos. They mock and ridicule the public as they decide who is worth what to their bottom line. They’re uniqueness is a hallucination.

Contemporary society is leveraging well understood propaganda techniques to take advantage of the same biological quirk religion stumbled upon by accident.

One person is one person. Not some figurative thought leader we must kowtow to.

Bounce fees are highly profitable. Large banks earn over a billion dollars in bounce fees yearly each.

This is true, but bounce fees are a minority of bank revenue.

I just pulled the BofA 2021 10K [1] and it shows $3.5bln in service charges, but $24bln in interest income.

[1] https://imgur.com/a/cGjM5Gi

Many banks actually make most of their profits from fees not whales. A X$ overdraft fee quickly enters payday loan territory in terms of profit vs capital at risk.

Exactly. Most banks lose money on servicing a standard checking account with debit card for people with no cash flow issues. They make it back in fees(mostly overdraft) off those who struggle - it’s a direct subsidy of the better off by preying on the poor.

Disclaimer: I work for a neobank (chime) which inverts this model and has none of these fees and does free overdraft

> "Most banks lose money on servicing a standard checking account with debit card for people with no cash flow issues."

that's simply not true. the marginal cost of a checking account is on the order of a dollar. the breakeven on that is on the order of holding (and otherwise using) a deposit of a $100 for a month or two. banks are not losing money on the balance of their checking deposits in any conceivable way.

that's a just-so story told and retold uncritically to convince the gullible that fees are "necessary". they're not. they're pure profit, and borne of pure greed. no bank requires fees to function profitably.

Marginal costs can be deceptive, yes sending a debt card in the mail is cheap and you don’t need extra staff or locations for a single customer. However, the infrastructure need to support a million additional customers is expensive even if a single customer doesn’t seem to add any significant cost.

it's tricky but not deceptive. raising that point in this context indicates you've fallen for form of the sunk cost fallacy via conflating two separate business decisions (the investment decision with the pricing decision).

we need to say no to these unsubstantiated, regressive fees, full stop.

I don’t see how acknowledging the truth is somehow supposed to support a bank argument. I would happily ban these fees until the industry adapted to a new normal.

That said, don’t let your views blind you to the truth. Unscrupulous actors will often drive an industry into predatory practices, it’s correctable but only when people understand the dynamics involved.

> "don’t let your views blind you to the truth....correctable but only when people understand the dynamics involved."

indeed.

those sunk costs don't matter in this context, which is why they were originally, and should continue to be, excluded. it's extraneous, obfuscating, and most damningly, apologetic.

It seems like customers who get rejected by ChexSystems would be more likely to overdraft frequently and be profitable to the bank. Why are banks using the system to deny them accounts?

I ran into this many years ago with the transaction reordering scandal, when KeyBank turned a series of transactions on a given day (that were all cleared funds, to be clear) that should never have overdrawn me, and left with me with roughly $100 in the bank, instead ended up with me being $400 overdrawn, thanks to an absolute slew of overdraft fees, that the bank (and I) refused to budge on.

My ChexSystems entry wasn't removed until there was a lawsuit against the bank.

Then you’re just making all your money on interchange, right?

It seems like there could be two kinds of customers at a bank. One who doesn't get to operate on credit or overdraft protections, but still can us the bank as a means to keep their money safe while allowing customers who can be trusted to still use those extra resources.

Seems like a win win for everyone. Banks should probably be required to allow at least a minimal bank account even to people who aren't the best with their money.

Win win for everyone except the banks, they make huge amounts of money off punitive overdraft and are not interested in letting that go. $12.4 billion in overdraft fees in 2020

A credit union I used to belong, had a piece of paper hanging on the wall right next to the tellers, it had their running income monthly from overdraft fees.

Before the 2008 real estate collapse, this number was less than $100,000 per month.

During the recession, I noted it was going as high as $600,000 per month. At one location in Sunnyvale Ca.

I don't doubt you, since you saw this first-hand and didn't hear it from your friend's cousin's dog. But what purpose could a sign like that serve for tellers?

It wasnt for the tellers, it was literally for the banking customers.

It was the statement of revenue the credit union had - the overdraft section was a single line on the document... I am uncertain as to why they posted it, aside from a "transperency" for the credit union members...

I could be outdated, but weren't overdraft feels turned off by default during the Obama era? You have to go out of your way to turn them on now.

> if you've had overdraft fees, bounced checks, etc opening new accounts at banks that utilize ChexSystems becomes nearly impossible

To clarify, if you've had a checking account closed because of outstanding fees, and you never paid those fees, it will show up in ChexSystems.

This deserves scrutiny, e.g. for bad record keeping. But at its core, if you're regularly borrowing via overdrafts and bouncing checks, you're looking for a different banking product than the garden-variety checking account.

You’re looking for a revolving credit line

> You’re looking for a revolving credit line

Or an account that does not permit cheque writing and will bounce a transaction instead of letting it overdraft.

This is the requirement now-affirmative consent/opt-in:

https://www.nafcu.org/compliance-blog/overdraft-protection-m...

If they make it really easy for you to opt in/a quick checkbox then they can make money. That said if someone is living so tight and wants a transaction declined if their account doesn’t have the funds, the financial should make that easy and obvious to do. Behaving otherwise is predatory.

> Or an account that does not permit cheque writing and will bounce a transaction instead of letting it overdraft

Seems like the problem might be that this system will also prevent people who have a bad reputation in it from getting one of these accounts?

> this system will also prevent people who have a bad reputation in it from getting one of these accounts?

Could. In practice, plenty of banks fill this niche [1].

[1] https://letmebank.com/banks-that-dont-use-chexsystems/

Oh it's a little more pernicious than that. ChexSystems and a few other companies are used to check a database when cashing a check at major retailers in the US. Walmart and Kroger utilize this third-party vendor to deny check cashing (including payroll checks) to people who're on the same list as those who can't open bank accounts. Good luck getting that check cashed for less than $20-30.

Source: I used to work in retail.

Wow, I wasn't aware of this use of ChexSystems but from the standpoint of banks, check cashers, etc that makes business sense.

From the perspective of people trapped in this system paying 10% in fees to cash a $300 check is outrageous - but at this point it's more or less what they have to do and that's "just the way things are".

That's why many larger employers (including Walmart) now offer unbanked employees the option of getting paid with a pre-paid card instead of a paper check.

That was an awkward experience, I tried to open a bank in person and was blocked because of Chex. It is my fault though, but for example I opened a Citi checking account and never used it but somehow it had some minimum balance or something, started charging me... I had to pay like $38 or something to close it.

I had the overdraft fees problem with BofA too and recently some suit was settled/I got a $20 check.

JDBs suck but I did turn my stuff around eventually eg. 300s to 750s.

I once had a check for about $900, drawn from a home equity line with tens of thousands available, rejected at a camera store by the Chex system which the store used at POS.

There was no recourse that I could find despite spending quite a bit of effort trying.

This was many years ago but remains a mystery as my credit was, and remains, great.

> In the case of the debit card example (or credit cards) banks could do what they used to and actually decline the charge. However they've clearly figured out it's much more profitable to allow the charge and just hit people with (often excessive) overdraft and over credit limit fees.

It should be noted that overdraft services have been opt-in only since 2010:

https://www.consumerfinance.gov/rules-policy/regulations/100...

>However they've clearly figured out it's much more profitable to allow the charge and just hit people with (often excessive) overdraft and over credit limit fees.

Wait, so which one is it? Do banks want to exclude people with overdrafts because they're bad customers (for whatever reason) or do they want those people because they can rake in the overdraft fees?

Why can't it be both?

With the proliferation of "free checking" without so much as a minimum balance in most cases banks have essentially created a selection system to continually marginalize customers that aren't profitable while selecting for customers that are.

From the standpoint of a business (which banks are) this is understandable. However as has been noted in other comments banks also serve a utility function and for the the type of customer that routinely doesn't have $2.50 in their checking account to trigger that overdraft in the first place several hundred dollars in fees might as well be a million. Of course they take off and the account gets closed. Now, because of a $2.50 loss to a bank, they're essentially excluded from the most basic functions of the financial system while people like us continue to benefit from free products, preferred interest rates, credit card points, etc.

Simultaneously, if due to some perfect storm of events (cash flow, mistakes, etc) if customers more similar to us somehow end up in this situation we'll pay the fees. The bank has a "valid" reason to boot the poor, they make a ton from the middle-ish class, and they stay in good favor with those of us that are more wealthy. They can't lose.

The extremely simple (but overall less profitable solution) is to just decline the charge.

My preferred status at banks is being subsidized by the poor and that doesn't sit right with me. I've tried credit unions but they're almost completely unable to meet my needs.

They probably want those people as customers in order to garner fee payments, but they won't extend credit to those people. Those are two different activities.

except, the parent post claims the system to "essentially keep unbanked populations unbanked" and "opening new accounts at banks that utilize ChexSystems becomes nearly impossible". Presumably if you want these people to be your customers and rack up fees, you'd want them to at least hold an account?

> Wait, so which one is it?

They want customers they can extract usurious and otherwise abusive fees from. They don't want the subset of those that will fight back against said abuse, which is what they use ChexSystems for. The latter also randomly hits some people from the (rest of the) former group, but not enough of them to impact the bank's finances.

There are lots of banks now that don't use ChexSystems now,some bank tech companies that you can get accounts with your mobile phone, so that helps for some of the populations.

As far as the debit card issue goes- if you are bad at managing your accounts- you should always opt out of overdraft ability, an option that consumers have legally had for several years. If you opt out of electronic overdrafts, your bank cannot legally charge any overdraft fees for those transactions (they will probably decline the transaction... but if they do allow it, you can't be charged a fee if you have opted out). see https://www.consumerfinance.gov/about-us/blog/understanding-...

My bank (USAA) allows me to configure it to automatically take a credit card cash advance (rounded up to the nearest $100 increment), which is my preference for the every-other-decade situation where I would otherwise have an overdraft.

Reply on news.ycombinator.com