If you’re not rich, your bank probably wants you to overdraft | Hacker News Reader

If you’re not rich, your bank probably wants you to overdraft

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25 pointsjakefuentes22 comments

While I think overdraft fees are gross and exorbitant (and I fell at their mercy a few times before I finally wizened up and got overdraft protection), I don't really think this is that big of an issue (at least, compared to other issues in the banking system.) It's a pretty solvable problem from the consumer end -- don't spend money on a card if you're not sure you have at least X in your account.

This is needlessly burdening the customer, which in my opinion is the textbook definition of bad customer service. The days of hand-written checks in the consumer space are largely gone; and the bank knows at any given moment what the customer's current account balance is and which transactions are pending. Permitting a card-based withdrawal or debit request that the bank already knows is likely to result in an NSF at settlement time is both misleading and adversarial to the customer.

This entire issue would grind to a halt immediately if banks properly denied debit requests when permitting them would yield an NSF.

I agree that this would work for debit transactions, but, my understanding is that the way ACH works, it would be rather difficult to accomplish this.

wtf? If the person can't be bothered with keeping track of their charges, they deserve a penalty.

This can get a little tricky though... I have two bank accounts, one which is my monthly spending and one which is my emergency fund. Because of this I transfer surplus money out of my monthly spending account so that what I have in there is just my budget, forcing me to stick to it. Unfortunately sometimes this causes me to overdraft because of a payment I forgot about (a few months ago it was eBay seller fees, first time in a year I sold something on eBay) or because some credit transactions won't show up for a day or two.

Of course this is still easy to solve by monitoring your account and knowing where you stand plus keeping a buffer. Since I like to keep my main spending account set with just my monthly budget I get around it by having a small overdraft line of credit. The 8% interest on that is a lot cheaper than the $40 overdraft fee and usually if I use it it's only because I'm over by a few dollars.

Overdraft fees are absurd, but so is complaining about them. Just go to your bank and ask them to disable overdraft. If you don't have the money and overdraft is disabled, the transaction will simply be declined. If you want to spend money you don't have yet, you can do it the normal way, by borrowing.

(Also, flagging the article.)

So, that seems like a reasonable answer, but historically that wasn't sufficient for me. When I was an HSBC customer in college a few years back, I had disabled overdrafting because I did not want to receive overdraft fees and, in a pinch, I could use a credit card if my charge was declined.

One day I checked my account and discovered that I had accrued a number of overdraft fees. Apparently sometimes merchants (namely gas stations) will put a temporary charge of a dollar against your credit card, then later correct the charge to the correct price. This caused my account to overdraft as HSBC didn't deny the correction, then with my account overdrafted as of the date in question, all subsequent valid charges I had done against the account assuming a one dollar gas charge were made as overdraft charges. Contacting customer service and reminding them that I had in fact disabled overdraft was not enough to convince them of anything other than giving me a one-time partial credit of fees, so I switched banks.

I don't know if that is still how things are done over at HSBC, but ultimately the point is that disabling overdrafting is not some panacea for the problem, as ultimately there are situations that can still get you in trouble.

Also, sometimes ACH debits will cause unpreventable overdrafts for you.

What I do now (I realize this isn't really an option for a lot of people) is basically mentally subtract $500 off of my checking account balance, and would never spend any money if there's less than that in there.

The graph in the article suggests the bank's cost for a checking account per year is $250. Wow. That seems like a huge opportunity to provide better banking service. Driving that cost down to $100 or so would be a very big deal.

According to the CFPB, The banking industry charged a total of $32 billion in overdraft fees to consumers in 2012, an increase of more than 60% from $19.9B in 1990. Part of this increase is that banks have been turning the screws on consumers, increasing the average overdraft fee from $27 in 2007 to $34 today.

Those fee increases would be more acceptable if they went to cover the costs associated with those transactions. Unfortunately, this is not the case. Only 14% of the average fee goes toward the cost over covering the overdraft, meaning that 86% of the average overdraft fee is pure profit for the bank.

Collusion sucks and keeps the amount that consumers shell out unnaturally high. Anybody that would compete on price gets bought, eventually, by one the big banks (Chase, BoA, Wells Fargo, etc) because they're just buying customers. Your small-town bank that offered cheap checking gets bought by big bad Chase and now you have to pay $35.00 for overdrafts, ad nauseum.

Something similar is happening right now with collusion between payments processors (like WePay, Stripe, Balanced) and those same big banks regarding Interchange, "processing fees", etc. The Durbin Amendment, which the author mentioned briefly (but with an outdated reference) was a start in the right direction but there's still a long way to go. More on the Durbin Amendment: http://ink.hackeress.com/2013/08/its-time-for-price-war-in-p...

On the other hand, the big banks are creating a market opportunity for retail banking services that do not profit from fees. I chose to work at Simple [1] in part because I believe competition in this space will improve the industry as a whole.

The best weapon against predatory banking is giving customers the tools to understand their own finances. Because fees comprise an ever-growing portion of profits, it is not in the big banks' interest to provide these tools, thus they will always be a poorer experience than the services that do.

[1] https://simple.com

Banks have a lot of overhead. Typically, they do not write their own software - they buy a package (and spend nearly as much time/money writing integration code, but that's a separate topic.) There's also mandatory costs -- SOX says you must have a disaster recovery plan in place, and you must conduct regular tests. You must have access controls in place, which includes things like mandatory vacation time for sysadmins and developers (so they can't write backdoors into the systems).

Customers not having access to their funds because of system problems is highly frowned upon by regulators, so high-availability with redundant computers + software is a given. Passing a SAS-70 audit is just the beginning.

Fact 1: If you don’t keep several thousands of dollars in your checking account, overdrafting is near the only way your bank makes money on your account.

I thought the bank could make money by lending out a multiple of all the money deposited, such that if I deposit 1000 dollars, they can now lend out on the order of 30000 (i.e. thirty times) that. If they lend that out at, say, 10% interest, they can make 3000 a year because I have 1000 in my account.

The magic of fractional reserve banking. If I've misunderstood this, I'd very much like to be corrected, please.

I don't think it quite works this way... if you deposit $1000, the bank isn't required to keep $1000 on hand, so with your 1/30 ratio, it means they would hold onto about $34 and loan out the rest with interest.

I am definitely not an expert on banking.

You're right in the first step; we can only end up with the 30000 dollars if the money is deposited and relent several times ( http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exam... ). The example uses a single bank, but given that all the money goes through various banks as people borrow it and put it somewhere, I could still expect my 1000 dollar deposit to end up in aggregate as a 30000 dollar loan.

Yes, and to add to that, credit card companies do not want you to pay your balance off in full every month, because even though they get a 2-3% cut of every credit transaction from the merchant, interest is still how they make most of their money. I have heard that within the credit card industry, they even colloquially refer to such responsible cardholders as "deadbeats!"

In the 8 years I have owned a Credit Card I have never waited to pay off the full balance. I also get the cash back (0.5% - 1% and 1% - 5%) which isn't a lot, but an instant discount on all purchases. Credit card companies will only make money off of my transactions.

Interchange fees would have to be much higher if they were a larger percentage of a credit card company's revenue (as they are for AMEX). This would end up resulting in higher costs for consumers.

That's a circular argument--there are obviously two ways that the share of revenue from interchange fees could become higher than they are now--increase the interchange fees, or decrease the interest rates, membership fees, and other revenue sources (or both).

Higher interchange fees would necessarily "end up resulting in higher costs for consumers" only if the interest rates didn't also decrease. Are you assuming the credit card company's total revenue is a fixed constant?

Or are you just suggesting that if a very large group of cardholders collectively decided to pay off their credit card balances in full every month so that credit card companies didn't make a cent in interest off them, that credit card companies would simply increase their interchange fees to compensate? Perhaps. But then a lot of merchants would stop accepting credit cards. They could face antitrust litigation again. Perhaps they would just add/increase yearly card membership fees, cut back on rewards, lay off customer service staff, etc. Who knows? They make their money in several different ways, and each of those they are already squeezing as much money as they possibly can out of consumers and merchants.

The way I see it, as a responsible cardholder who pays my bill in full every month, merchants and irresponsible users of credit are just subsidizing my free 30-day loans, cash back rewards, and frequent flyer miles, and I'd prefer that they keep doing so.

>>> Higher interchange fees would necessarily "end up resulting in higher costs for consumers" only if the interest rates didn't also decrease.

Businesses do not pass on interchange fees directly to the customer. It is not a line item that appears on your receipt after you make a purchase. This is largely because credit card companies forbid merchants from charging an additional fee to customers for using credit cards.

This means the only way for merchants to recoup interchange fees is to raise the prices of their goods across the board. This means prices go up for everyone, even those without credit cards. So a non-credit card user would see their prices go up as a whole, without the potential offset of reduced interest costs.

This is true in most cases, but merchants have a lot of tricks they use to try to reduce the amount of credit card interchange fees they pay. A lot of businesses actually do charge a "convenience fee" for using a credit card, or offer a discount for paying in cash, or they set a minimum purchase amount at which they will accept a credit card, etc. A lot of businesses also flat out refuse to accept cards like AMEX and Discover because of their higher interchange fees.

It would be interesting to see how this equilibrium might change if CC companies tried to increase interchange fees across the board. I think they would see a lot of resistance from merchants and possibly even government scrutiny and lawsuits. Don't forget that the CC companies have to compete with each other, and cannot collude to raise interchange fees.

Anyway, my point was not that higher interchange fees wouldn't get passed on to consumers somehow, it was more that if most cardholders stopped carrying a balance and paid much less interest to CC companies, and CC companies then increased their interchange fees to try to compensate for the decline in interest revenue, consumers as a whole might still be better off than they are now. There's more than one variable in the equation here, and right now credit card interest is probably a much bigger cost to consumers in the economy as a whole, than interchange fees are.

"That's a circular argument"

If it sounds like a circular argument to you then that's because economics involve systems of feedback. It's not as simple as A causes B. A has an effect on B which has effect on A. This isn't a very difficult concept that you needed to waste 4 paragraphs on.

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