Banks Are Now Accused of Cheating Customers Billions | Hacker News Reader

Banks Are Now Accused of Cheating Customers Billions

franknez.com

150 pointsrandycupertino70 comments

Key paragraph (from the original FT article):

> The issue has arisen from idle cash sitting in customer accounts at brokerage firms and large banks, which “sweep” otherwise uninvested funds into interest-bearing alternatives in order to generate income. The SEC is looking into whether the firms steered those clients into sweep accounts that paid little or no interest, and whether the financial advisers at those groups had a fiduciary duty to advise clients they could make higher returns if they moved their cash into other accounts.

Yes. Before brokerages were part of banks, cash in a brokerage account was usually stored in a money-market fund, with whatever interest money market funds were paying. Once merging with a bank, cash was swept into an in-house bank account.

This didn't matter much when money market funds were paying near zero interest. But the zero interest rate era is over. Except for demand deposits in banks, which pay well below money market rates. Often near zero.

That's what's going on here.

It's a conflict of interest created by the end of Glass-Stegall, which kept brokerages and banks apart.

My parents instilled in me a mild distrust of banks. It's for this reason that I get my statements mailed to me each month, and each month I reconcile what's on the paper with what's in my spreadsheet.

Guess what? Every year I find a mistake in at least one bank statement. And it's always in the bank's favor. Sometimes it's a few cents, but once it was a few hundred dollars across multiple errors.

When I've told people this in the past, I've been dismissed with "Oh, I use Venmo instead of a bank, so it's always right," or "Oh, it's too hard to figure so that out."

I simply don't understand people who blindly accept what an app or web site tells them about something as important as their own money.

I know they don't teach balancing a checking account in high school anymore, but you should be able to add and subtract to get through life.

No, the computer is not always right.

I see it less as an issue of blind trust and more of an opportunity cost I guess. While it does raise my blood pressure that banks can slip in these little mistakes that almost always favor them, I don't see myself ever investing as much time and effort as you did to verify the numbers every month.

Maybe once these AI agents get reliable enough, it might be a fun side project to automate the verification process.

Unless you hold a lot of money, you're at the mercy of someone actually caring to fix it, and if not an annoying and possibly expensive lawsuit

It's not I trust the bank, its just the times they've stolen under $500 from me they've more or less said 'fuck you deal with it' and after that I can just work to make the cash back a lot easier than I can sue for it. So I just closed my accounts and did that.

Fighting the banks over chump change sounds nice in theory or if you can start a class action but if not it's kind of like suing the cops, basically a wild goose errand for anyone but someone with a lot of time and a pro bono lawyer.

Yeah, it's a bit of a war of attrition.

Most of the mistakes I see are things like restaurants charging more than what was on the bill, and if you paid with a credit card, these are usually very easy to dispute. From actual banks, I haven't seen any problems, and yes I check whether the interest and dividend payouts are correct--they always are.

The article here is about banks defaulting customers to low-yield sweep accounts, but it doesn't look like they are actually under-paying interest. The accounts just don't pay a lot of interest. Honestly, the customer should know how much interest their sweep account pays and move that money to higher interest accounts if that's important to them. Whenever I put cash in a brokerage that I'm not going to use for a while, I always take the time to move it from the cash sweep account to an interest-bearing account. Buyer beware!

Somewhat related story about banks just saying "fuck you deal with it."

I left a subscription and long story short I got charged an extra $119, which was the monthly fee at the time. I reached out to the business over and over again and eventually they just said they were not refunding it unless I came back as a recurring customer, which I wasn't interested in doing. I submitted a charge back, submitting all my supporting information that the charge was extraneous beyond what I had agreed to pay, and eventually after a few months the bank (Discover) agreed with me and claimed the chargeback was settled.

Fast forward nearly a year later and boom a $119 charge pops up on my card. Discover tells me that the retailer had appealed (a process I was never notified about and didn't get a chance to respond to), that they accepted the appeal and the decision was final.

The wrinkle in this is that at the time I was in the process of digging out of a high five figures in credit card debt and this card had a ~$25k balance month to month so they were getting about $600/mo in interest from me. I called a manager and said "I have been paying this off at the rate of $2-3k/mo and plan on continuing to do so if you reverse that charge, otherwise I'm transferring the balance to another card and the interest ends today."

For whatever reason they were totally willing to throw that money away over $119, so I transferred the balance and closed the account. It is totally believable to me that they would do more or less the same thing with stealing money from cash accounts, if not intentionally then at least negligently and not taking the time to properly investigate.

Unless you hold a lot of money, you're at the mercy of someone actually caring to fix it, and if not an annoying and possibly expensive lawsuit

My experience has been the exact opposite.

Even for errors under a dollar, even big banks like Chase and Bank of America have fallen all over themselves to fix things immediately.

What kind of mistakes are these? I've been reconciling my bank statements for decades and if it doesn't balance, it's been my mistake.

He just uses a crap bank.

Crap banks abound.

And some are very big, too.

So it seems that over multiple years and considerable hours spent on this chore, the payout was a few hundred dollars? Assuming it was corrected? That's not a great cost/benefit ratio.

Dollars to donuts you've spent more in your own time reconciling than you've recovered in bank errors.

I'm really curious to know what type of bank errors you are talking about. If they are true errors then they should not be biased either way. i.e. sometimes they would be biased on your favor. But if they are always biased in their favor then maybe they are not really errors?

> Every year I find a mistake in at least one bank statement. And it's always in the bank's favor. Sometimes it's a few cents, but once it was a few hundred dollars across multiple errors.

How much time have you spent on this overall compared to the amount of money you saved by noticing these errors? I certainly don't think it's fair for banks to get away with this, but I'm not convinced that tracking things at that level of detail would be worth it for most people

How do we know that banks are making these errors if no one checks? It might be a few bucks on your account here and there but if that happens over millions of customers... That's a nice little scheme for banks to get away with.

Startup idea: we audit your financial accounts for you. Do a Plaid-style link, and we take it from there. Charge whatever antivirus subscriptions cost.

Of course the startup also charges banks to find errors in the customers' favor.

We don't, unless they take a large enough mount that someone notices anyways. To me, that's more an argument that there should be more regulation here (Glass-Steagall was mentioned in another comment, which doesn't directly address this specific issue but it helps address perverse incentives in general) than the idea that people should have to spend time on this. Given how vital banks are to modern life and the number of purchases that an average household would need to check against each month, this seems like a case where the common good is better served by holistic changes than telling people "just do the work yourself". I'm politically more on the left than the average person though, so obviously opinions here will differ.

Original article: https://www.ft.com/content/de751907-c870-4b8c-b86b-317483f76... (https://archive.is/wxqsC)

… this website, "FrankNez", has recently been spamming subreddits Reddit recently too, some off-topic from what is being spammed. (Their user there: https://www.reddit.com/user/OfficialFrankNez/, so you can see for yourself.) — e.g., an article "Kamala Harris Is Now Proposing Raising Crypto Tax To 28%" was cross posted to 13 subreddits and removed by moderators on at least 9 of them. It smells like it's just rehashing news for ad revenue.

To be clear: I don't think OP here is involved; their post history seems varied, so they may just have picked this up from somewhere else. I'd be curious to know how they came across it, because it might be a tad interesting to see how these things spread.

But these "as reported by" articles, just ditch that article and read the upstream source. 99% of the time, they add nothing of value, and are just plating it with ads.

(There's also https://www.reddit.com/user/BFA_Artist/ doing the same thing, just nothing but that site, spammed from an account that claims to be a person. Like … it smells. Nobody is like "man, I love this site's news. I'm going to spam everything they write to 20 subs". Came across that just trying to trace back by own steps…)

(I should also mention that normally for blogspam I'd sort of lean into a "flag and move on", but here there's the problem that I think the content of the underlying FT article — banks screwing customers w/ 0% interest rates on their savings when interest rates are high — is worthy of discussion here, and I don't desire to kill that with a flag…)

Thanks for pointing this out. I couldn't get past the paywall of the original article and so posted this one. Also thanks to the person who posted the archived ft link!

This happened to me with Umpqua Bank. They offered a money market account that sounded great. I basically forgot about it, and checked my statement one day to find it earning 0.05%. Not 5%, 1/100th of that.

My fault for not being diligent. Missed out on a lot of interest earnings as a result.

Edit: I have since moved all of my banking business to a local credit union and closed mine and my kids' Umpqua accounts, and opened a Schwab account for better interest earnings from their money market fund offering.

Not sure if is the same, but I noticed that account interest rates that went down when the reserve rates went down didn't go back up. We opened up accounts for our kids at a local credit union that had close to 0% interest. Fast forward 2 years and the rates are just as bad or worse. Savings accounts are 0.25% compared to >4% at other credit unions.

It makes sense for interest rates to go down when the reserve rate is cut. That means there are more dollars to buy bonds with pushing up the price and lowering the yield (the inverse relationship between price and yield is a mathematical identity). Eurodollar rates are routinely lower than us dollar rates, and they don't have any reserve requirements.

Credit union deposit rates are usually tied to how much they need deposits, as opposed to what prime/sofr/fed are at. Credit unions whose lending isn’t keeping up with deposits (which is especially common in smaller CUs) will keep rates low to avoid paying a bunch of interest of funds that they can’t use productively.

Who has the best interest rates for idle cash? I have been using Marcus, but it is not a huge burden to shop around.

It's hard to beat a decent money market fund.

But you want a MMF that is the sweep. Like Vanguard, but not Schwab.

Sure, there are some benefits to that. I happen to use Vanguard for this (VMFXX sweep).

I am a fan of fidelity. They have a cash management account with checking features. You can choose between a bank sweep at ~2.5% or a money market at almost 5%.

Edit: There are always non-checking accounts that do better than the above, but I think there is real value in focusing on your checking account -- if you have to move money back and forth to get good rates, is that worth the effort and what's the opportunity cost of the funds that sit in the low paying checking account.

For money markets, it's typically vanguard. Other brokers that are not bad for sweep include IBKR, Fidelity, Schwab, etc. But vanguard will always have higher interest on cash.

Marcus is FDIC insured savings though, which has slightly different implications. There's websites that compare current highest savings rates (nerdwallet, bankrate, whatever).

Going in the other direction, there are things like SGOV or Treasury-only money markets, if you live in a state that has higher income tax. Since the treasuries are exempt from state income tax.

Going even farther than that direction, there's muni bonds, funds, or money markets. At which point you're probably back to Vanguard for the best rates. (But again, not the same exact characteristics as a savings account)

You can also directly buy short term US treasury bills, which are paying roughly 5.25%, are auctioned weekly, have an extremely liquid secondary market, no fees, and essentially risk-free (backed by the US government).

> Going even farther than that direction, there's muni bonds, funds, or money markets. At which point you're probably back to Vanguard for the best rates. (But again, not the same exact characteristics as a savings account)

Yeah, very different product. Muni bonds are riskier than treasuries and much longer term than money market funds / treasury bills. E.g., VWSTX ("ultra short term muni") has an average maturity of over a year and 45% of portfolio is worse than AA. Vs VMFXX (money market) with an average maturity of 11 days and the entire portfolio is backed by the US government, which is essentially as good as it gets.

For the sake of completeness, it important to recognize that muni money market funds exist, such as VMSXX, VCTXX, and VYFXX.

My impression is that the current yields of these funds are not high enough to justify for most taxpayers, compared to other funds. But since everyone is different, it can be helpful to sit down and do the math for your individual situation.

https://thefinancebuff.com/best-vanguard-money-market-fund-y...

Agree in general, with minor caveats:

* Schwab's roboadvisor product has decent rates for cash sweep, but their self-directed brokerage has the rather weak rate of 0.45%.

* The first $10k at IBKR earns 0%. Also, IBKR Lite also has a weaker rate (3.83%) compared to IBKR Pro (4.83%).

Of course, with a bit of extra effort, you can buy SGOV etc. in your brokerage for better rates.

[1] https://www.schwab.com/cash-investments

[2] https://www.interactivebrokers.com/en/accounts/fees/pricing-...

Check out your local credit unions.

Local credit unions rarely are at the same level as HYSAs because they have physical infrastructure to maintain

Mine gives 4.75% APY, which seems to be in the ballpark as what others in this thread are discussing.

Well I am glad I don’t see people writing about “high yield savings accounts” as often I see that copy pasted from old tutorials on basic investing.

Maybe I am wrong but I don’t think there were any “high yield” savings accounts for at least a decade or even more.

All savings accounts I see are mostly below inflation or around the same. Where high yield for me would be at least 1% or 2% above inflation.

Inflation is now below 3%. HYSAs are above 4% right now, so are beating inflation by a good margin.

Of course, changing interest and inflation rates can change that.

> Inflation is now below 3%

Officially.

In the long run you aren't going to be beating inflation by 2% with your cash or equivalent (CDs, treasuries, repo, whatever). That's in the 0-1% above inflation range, and likely on the lower end of that scale.

Even intermediate or longer term bonds struggle to get 2% real returns.

But yea, "high yield" is a misleading name for savings accounts, and there isn't a huge point to it now, especially after the liquidity rules on government money markets got tighter after dodd frank.

There is still one benefit to having at least a month or two of expenses in a savings account though - FDIC. In an emergency that also crashes your bank, FDIC turnaround is like one business day. SIPC exists for brokerage holdings, but it is glacially slow by comparison.

In HYSAs, SoFi gives you 4.6% if you direct deposit every month. The direct deposit doesn't need to be significant, just $1 is enough from what I hear (I do ~$50).

Wealthfront Cash is 5%

Do note that their backing bank is greendot. If you sign up with a custom email address (eg: not gmail/yahoo/outlook/etc), your wealthfront account will still be created, but stopped from actually opening an account for failing verification.

As for verification goes, it's a black box from greendot's side[1].

[1]: https://www.reddit.com/r/wealthfront/comments/11t7k56/wealth...

That hasn't been my experience. My email is at my own domain, and I haven't had a problem. However I opened my wealthfront account many years ago.

Discover bank and Apple bank are both above 4% for the last year.

Not only because of interest payments banks defrauding customers but also due of hidden charges.

A month ago I got a mystery deposit then a letter explaining why I’d been given hundreds of dollars back from my bank… I’m thinking they were trying to get ahead of this kind of investigation.

The outstanding interest may have been given back to you by your bank.

My 80 yr old mom had her atm card stolen. The guy withdrew close to 5k in small dips over a week. He had the pin, so my guess is he watched her enter it then distracted her to swipe the card. Bank refuses to cover it, despite her reporting it immediately on discovery. They claim if he had the pin, then she was negligent, and they are not responsible.

This presumably happens regularly, as the guy's con was very practiced and slick and he knew exactly what to do to maximize the payoff. But the bank didn't pick up on the obvious pattern, and evades responsibility by blaming the victim.

This is why I keep all but ~$200 in a bond ladder in my brokerage and pay my credit card bills directly from my paycheck.

The bank is just an ACH terminal now.

Yup my broker did this and I now put everything into ICSH. It goes up everyday and back down at the first of the month when it pays dividend. So you can get your interest early when moving cash in and out of investments.

A tidbit from the 2007-2008 crash: I was banking with a Credit Union in Silicon Valley at the time of the crash.

I would go into the bank once or twice a month and the teller-line had a cork-board on the wall to the left, and the CU would post a Line-Printer style balance sheet of various financials they reported on for reasons because a co-op credit uninos transperency bylaws (Im assuming thats the thing) required it...

I used to lok at it each time I was in the brankch because I despise banks and their inner workings (my mother was in wachovia/wells fargo commercial loan executive when the whole fraud accounts, and other bad things, BCCI Iran Contra Khshogghi, Keating Five Savings and lone, PPE loan scandal and tarp, and goldman sach - you get the idea)

Anyway, the one line item I always looked at "OVERDRAFT REVENUE" Where it was in the ~$20,000 to $40,000 prior to the crash, at the peak of the crash they posted $500,000+ every TWO weeks in overdraft fees from the members of the credit union.

Every time I see news of (alleged) fraudulent bank practices, it always seems to be Wells Fargo and Bank of America...

Relevant recent Levine article on this from last week: https://www.bloomberg.com/opinion/articles/2024-08-07/ai-com...

> Cash sweep sweep

> If you go to a bank and say “I’d like to open an account and deposit some cash,” they will happily open a checking account for you, take your cash, and pay you an interest rate that is, in round numbers, zero. [4] (My checking account pays 0.01%.) If you say “no, I want a savings account, because those have higher interest rates,” they will happily open a savings account, take your cash, and pay you an interest rate that is … also 0.01%? Maybe 0.03%? But if you utter the correct series of incantations, at least some banks will open a high-yield savings account and pay you 5% or more. You gotta find the right bank, though, and utter the right incantations. Sometimes it’s tricky.

> ...

> People pretty regularly complain about this — “interest rates have gone up, why doesn’t my bank pay me more?” — and sometimes they even do something about it (they move their money to another bank that pays more, or to a money market fund). But the banks do not particularly get in trouble for it. Regulators understand that banks need cheap funding, and that if they can get cheap funding they’re supposed to take it. [5]

> If you go to a brokerage firm and say “I’d like to open an account and deposit some cash while I wait to find some good stocks to buy,” they will happily open an account for you, take your cash, and … well! They will probably pay you some interest rate that is higher than 0.01% and lower than 5%. They would prefer to pay you less, because brokerage firms also mainly make money by getting paid more interest on their cash than they pay you on your deposits. [6] Some brokerages advertise “we pay a really high rate on cash,” and thus attract customers who want to get paid a high rate on their cash. Others … don’t? Others advertise, you know, “we will give you good financial advice” or “we make trading fun” or “we have a good app” or whatever, and they get people who do not pay attention to how much they will get paid on their cash.

> On the other hand, there’s a sense that your broker has some fiduciary duty to you, or ought to, particularly if your broker is also giving you financial advice. If your broker is telling you what stocks to buy, she should probably also mention “hey, you have a bunch of money sitting idly in your brokerage account, and we’re paying you like 1%, but you could just put it into a Treasury money market fund that is essentially cash but pays 5.4%.” That would cost her firm money — it would give up your cheap cash — but would be good customer service.

> Is it mandatory? Eh, maybe a little:

(Links to the similar article, https://www.ft.com/content/de751907-c870-4b8c-b86b-317483f76... )

> But if you utter the correct series of incantations, at least some banks will open a high-yield savings account and pay you 5% or more. You gotta find the right bank, though, and utter the right incantations. Sometimes it’s tricky

Searching the internet for “list of highest interest bank accounts” with the device in your pocket is apparently a tricky incantation.

Shopping an entire country’s investment options has never been easier, and still there are complaints.

Just because it is possible to navigate through the dark patterns does not mean we should be comfortable with the situation. I do not have the time nor expertise in every facet of my life to know if I am getting a raw deal.

So what do you want, the government to mandate every aspect of your life?

Obviously, the government should be offering constitutionally protected and inalienable electronic money accounts that pay the same interest the banks get paid.

But that is not in the cards right now, so spending a few minutes, or maybe an hour at most reading a couple websites about which bank pays the most is really not much to ask. It’s called shopping, and it’s how a market works. Markets don’t really work if market participants evaluating which sellers are offering better value.

As if interest rate was the only important variable when evaluating bank accounts. Banks have plenty of ways to make money on unaware customers - or rather, to make it expensive in time and effort to avoid losing money on things like transaction fees, account fees, card fees, etc., many of which are waived if you deposit and/or spend the right amount of money in the right order through the right financial instrument in the right cadence.

(Not to mention, every bank has a godawful shitty app, and there's some serious opportunity cost in learning how to cope with the new kinds of shittiness of your new bank.)

>Not to mention, every bank has a godawful shitty app,

Well, not my bank. In fact i stopped using a third party app to track my spends. I do appreciate i may have struck gold with this particular app/ bank - and should i wish to change bank i will insist on going thru any new app to give it a fair shot. If it's not up to the quality of what i already have...no dice. I'm not wasting my time/ money tapping away on crap.

It basically is. If you search a list of top bank accounts on a number of websites (like doctorofcredit),you will see very quick and easy breakdowns of fees.

Pretty much all the popular online banks with high yield savings are fungible, they all offer free transfers and blah blah, there’s nothing to worry about.

One data point: IBKR pays you 4.83% right now so I think it's quite good. Not the full interest rate but it's a reasonable in my view payment for their service. They also pay you for every day the cash sits in the account. You can also buy any market funds and pay very little for the transaction. Just 2 days ago they also told me that I paid enough in market data refresh request (they are very explicit that those are not free) to afford monthly subscription so they automatically switched me to monthly subscription again telling me it's only for that month so I don't need to cancel anything if I don't want to continue.

Meanwhile my bank didn't even offer any interest on significant amount of idle cash there. Instead they offered me their "currency exchange services" which have approximately 1000x higher fees that what I pay on my brokerage account.

My experience is that my brokerage firm wants to make money but also makes effort to be fair to me. Meanwhile my bank wants to sell me services which are all bad for me. The difference between them is like night and day. The banks are in business of skimming, confusing and deceive their customers.

If you're going to the effort of switching from 0.01% to market rates, you might as well go straight to Vanguard and get 5.2% and pay essentially nothing in other fees. I don't think there's much in the way of compelling reasons for retail investors to select IB.

I am in Europe so no Vanguard money funds for me (they need to publish KID and for tax reasons they need to be accumulating) but I have chosen one from Blackrock.

There’s a ton of Vanguard ETFs in Europe that are accumulating.

I believe in the US Vanguard has a retail service too, so you don’t need a broker as the middleman.

One big caveat is that IBKR gives you nothing on the first $10,000 of cash. At current rates, they would be making ~$500 a year from you doing this.

https://www.interactivebrokers.com/en/accounts/fees/pricing-...

Levine is a national treasure. He's always so balanced, funny, and informative.

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