December 3, 2008, 11:17 pm
Banks stealing from young, poor
The FDIC criticized banks today for fee policies that prey on the young and low-income. No longer content to simply hold your deposit as a revenue-generator, banks are looking more than ever at their deposit accounts as fee-generating revenue enhancers, and they're targeting the group most likely to do things like overdraw: those who are poor and those who are just starting out.
Though I have only overdrawn one time in life (in South Korea after making an exchange rate error with some four hours sleep), I side with the FDIC in that some of these practices are exceptionally shady. In particular, one shady practice is when banks reorder transactions not in the order they are received by the bank, but in the order of the largest transaction to the smallest, thus generating extra overdrafts for themselves.
For example, imagine you begin the day with $1,225.00 and you spend $3.75 on coffee at Starbucks, $26 on gasoline, $79 on cable TV, $32 on dinner and $1,130 on rent (since checks are presented at the end of the day). If processed in the order in which the transactions took place, your rent check would overdraw your account by $45.75 and generating $29.00 for the bank in overdraft fees. However, if you place the transactions in the order of largest to smallest you actually overdraft after dinner, incurring three overdrafts for a total of $87.00 and the most expensive latte you've ever had in your life.
These fees hit young and poor customers because they are most likely to have small amounts, which are detrimental to the bank (since it likes large, stable amounts to fund its lending department). Still, though, these customers need bank accounts, and these fees are helping drive them deeper and deeper into debt, especially if they're on fixed incomes (e.g. Social Security recipients).
The government should end this practice, or limit the number of overdraft fees per day, to protect consumers and ensure that banks try focusing their mathematics efforts on their balance sheets where they belong.
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