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Senator Dodd Going Ahead With Overdraft Legislation

by Smithee on October 20, 2009

in Banking

We told you last month about banks deciding to let customers opt out of overdraft fees, first announced by Bank of America and JP Morgan Chase, and then the next day by Wells Fargo (and Wachovia, which it owns).

These big banks made the changes very soon after lawmakers announced an intention to try to regulate the extent to which customers are punished for spending money they don’t have.

Here’s a summary of the changes already made:

Opt out? Max daily
overdrafts		 Balance to trigger
overdraft fee
Bank of America Yes 4 -$10 *
Chase Yes 3 -$5
Wells Fargo Yes 4 -$5

* Fee will also be charged for overdrafts maintained longer than 5 days, regardless of balance.

Not satisfied, Senator Chris Dodd is still pursuing a new law that will enforce some limits on all banks.

Proposed legislation

The law introduced yesterday aims to prevent:

  • more than one overdraft fee per month;
  • more than six overdraft fees per year;
  • fees that are more expensive than the cost of processing an overdraft;
  • banks from manipulating the order in which they post transactions in order to rack up extra fees;
  • fees if an overdraft is due solely to a bank hold, such as the hold placed on funds when reserving a hotel, if the hold is greater than the actual amount of the transaction; and,
  • enabling overdraft protection on customers who don’t explicitly sign up for it.

3455410819_aed2a1b3ccIn addition, automated bank systems (SMS, e-mail, etc.), ATMs and bank tellers would be obligated to warn a customer if they were in danger of going negative (presumably with the current transaction), and be given the option to avoid that result.

Analysis

Opt-in

I am all in favor of “opt-in”. I want opt-in everything, but as we saw when Windows Vista was new, it’s maddening to be asked for your permission after initiating every single activity. Some things are perfectly innocent and should be opt-out instead. Frankly, I find it thrilling that for the first time, customers can opt out of overdraft fees. Apparently, it took the threat of new legislation to prod banks into introducing this, so sure, let’s make it all consistent.

Fee instances per year, and per month

One overdraft fee per month and six per year seems arbitrary to me. If I had to guess, I’d say this is related to the fact that banks stand to earn over $38 billion this year on overdraft fees, and they weren’t in danger of losing anywhere near that much from accounts which went negative and then stayed that way.

But I’m enough of a capitalist to admit that it seems wrong to limit profits just because it can be done, which this seems to smack of. When the full text of the bill is available, I’ll try to find more about where these numbers came from.

Fees more expensive than the cost of processing

To be sure, it’s part of a bank’s operation to process an overdraft, deal with a negative account, and pay the salaries of people who write the software and maintain the literal and figurative machinery.

But as was explained to me while working the phones at Bank of America, part of the fee is also meant to dissuade the customer from going negative, and failing that, to encourage the customer to bank elsewhere. Clearly, the fees are adding up to lavish profits at the expense of probably-well-meaning customers. In my opinion, it’s simply not right to profit because someone else fails, especially when that someone is your customer.

Manipulating the order of posting items to create extra fees

This should be obvious as a disgusting practice performed by a heartless behemoth of a corporation.

Overdraft fees because of a bank hold

This also seems like common sense. If a hotel has reduced your available balance by $250 when you’re only going to be paying $110, it’s unreasonably for the bank to punish you for being overdrawn. You had no intention of spending more than you have.

The same is true if there’s a hold placed on a deposit. I’m sure the vast majority of deposits that have holds placed on them end up being legitimate, probably at least 98%. A check made out to you isn’t the same as cash, but why not give your customers the benefit of the doubt, or at least avoid punishing them when you don’t and you end up being wrong?

Warning customers who are in danger of going negative

This just seems like excellent customer service. If a bank truly finds it inconvenient to process overdraft fees, they’d all be doing this today.

Sources

Dodd Introduces Legislation to Curtail Overdraft Fees, Jeff Plungis, Bloomberg, Oct. 19, 2009
Dodd Unveils Bill to Protect Customers From Abusive Checking Account Overdraft Fees, Sen. Dodd’s Official Web site, Oct. 19, 2009
Photo Credit: Tom T

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Cash Back Rebates Now Take the Form of Prepaid Debit Cards

by Flexo on August 24, 2009

in Credit

My girlfriend is an elementary school teacher in the New York City public schools. One of the benefits of her employment is the reimbursement for the purchase of supplies and materials used in her class. Any teacher will tell you that they are required to pay for many of their own materials, and the amount of the reimbursement is subject to a maximum that never covers their full expenses.

The reimbursements until recently were distributed via check, an old-fashioned method of payment. More recently, the City of New York switched to prepaid Visa debit cards, offered by Chase Bank. This must be the result of some sort of a deal between the city and the bank because it does not make much sense for the employee.

Debit cards are meant to be used for spending, but these reimbursements take place after the spending is completed. If you want to use the reimbursements to pay yourself back for your spending on items for the classroom, you must visit a Chase branch to convert the card to cash. We tried taking the debit card to her personal bank of choice, TD Bank, but they claimed to be unable to do anything for us with the debit card.

These prepaid debit cards seem to be the latest trend for rebates. Verizon Wireless, the cellular carrier of choice for both me and my girlfriend, offers rebates on a number of its phones. The last time she needed to purchase a new phone, the rebate came not in the form of a check as it had on prior occasions, but in the form of a prepaid debit card. These cards are touted for their “convenience,” but absent direct deposit I would prefer a check.

Verizon Wireless offers a feature where you can replace your debit card by entering your information online, thus deactivating the card and issuing the old-fashioned paper check to the address on your account. This is a better option but introduces an extra step that many people will simply ignore.

Checks find their way directly into bank accounts while debit cards only make appearances in stores for purchases. If your spending is tight, this might not make a difference. If you use the debit card to purchase something you would have had to purchase anyway, without the debit card, the form of payment won’t affect the amount you spend. Most people’s spending is not tight and controlled. When you send debit cards out to 80,000 teachers, I would believe that many will be used for extra spending and some will not be cashed or used at all. The same is true for wireless phone customers who receive those rebates.

There are reports that the debit cards issued for consumer rebates are unreliable. Some have no problems while others find that cards are declined when they should not be. Even worse, some of these prepaid debit cards have monthly fees. The new rebate debit cards offered by Staples charge a $3 monthly “account maintenance fee” after six months. In states where they are allowed, which I believe is every state except California, fees can eat away at your rebate card balance until you are left with nothing. It is best to cash these rebates or convert them into a check and deposit the funds as soon as possible.

Have you seen more rebates offered in the form of prepaid debit cards? What are your experiences?

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Answering Mail: Using Debit Cards as Credit Cards

by Flexo on August 6, 2009

in Credit

Every so often I address questions and comments I receive via email or Twitter. If you have a question, please contact me using the form on this page. I try to respond to everyone, but it might take a while before I read every email I receive.

From A. Parker:

What is the difference between the options when a cashier asks you whether you would like to use your debit card as “credit” or “debit?”

Merchants often pay the middlemen between them and banks less for “debit” transactions, which generally require you to enter a PIN. You will likely see merchants, if they show favor between “debit” and “credit” transactions, lead a customer towards “debit.” To use a debit card as “credit,” you are not actually using it like a credit card. Your bank account will still be debited immediately, overnight, or on the next business day. In most cases, you will be required to sign for the transaction rather than entering your PIN, but signature-less credit card transactions are increasingly common.

According to Visa, using a debit card as “credit” helps to ensure you’ll receive the credit card network’s protections like “Zero Liability.” This also ensures that Visa receives a bigger chunk of the merchant’s money.

If you have questions, let us know. You can email your questions directly to me (or to Smithee, Jeff, or Tom) or leave your questions in the comments area.

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More From Visa About Debit Cards

by Flexo on January 22, 2009

in Credit

Last month, a representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. It many ways, I find debit cards to be inferior to credit cards, but Visa claims the cards linked directly to bank accounts have some redeeming qualities. Here are three additional questions I asked Visa and the company’s responses.

What are your thoughts regarding Visa’s “defense” of debit cards?

Question 4: When using debit cards, do consumers generally spend more than they would
with cash?

Response: Debit cards offer a convenient, secure way to access funds that are already available in your checking account – which means you’re spending the money you have. You also get a record of all purchases so you know where the money went.

Paying with a debit card can actually a great way to manage your spending. Just last year we conducted a consumer survey and found that cash expenditures can be harder to keep track of than those on cards. We asked more than 2,000 U.S. adults about their cash spending habits and almost half of respondents admitted they suffered from “mystery spending” or cash they spend but have no idea where it went.

The results also showed that 48 percent of Americans surveyed who use cash say they can’t account for almost one-third of it, spending an average of $120 in a typical week, but losing track of $45. In fact, more than half (59 percent) of respondents who say their mystery spending is out of control feel it would be worse without using a debit card. Among debit cardholders we surveyed, the majority (64 percent) believe their debit card helps keep mystery spending to a minimum and four out of five say a debit card helps them track their spending. This feedback supports that debit cards can definitely be used as a money saving tool.

My comments: Keep in mind that this research cited by Visa compares using debit cards with using cash for payments. Also note that the survey asks about what consumers believe about their spending patterns, were they to opt with cash rather than debit cards, but doesn’t measure actual behavior. Many studies have shown that people spend more with plastic than they do with cash, even if cash expenses are often “mystery.” The company did a good job of not really addressing the issue raised in the question.

In November, I conducted a experiment to compare my spending with a credit card with my cash-only spending. Even though some of my cash transactions were not tracked to the cent, I spent a significant amount less than I did when I was using a credit card. I continued the experiment into December, and although I now I’ve ended the experiment and use my credit card, I am much more conscientious about my excess spending.

Question 5: One popular feature of credit cards is the availability of rewards, such as cash back bonuses, airline miles, etc. I have seen very few similar offers for debit cards. Are issuers interested in offering rewards to debit card customers?

Response: About 85 percent of U.S. households participate in at least one rewards program. Increasingly, consumers are looking for rewards and value for the transactions they make every day, like paying bills, buying groceries, or filling up their gas tank. As consumers turn to debit cards for these types of purchases, instead of cash and checks, more financial institutions are introducing debit rewards programs.

Often, issuers will pair up with a partner like an airline or hotel to give you the ability to earn points on a debit card toward rewards you care about. Some financial institutions also offer the ability to earn points for qualified purchases that can be redeemed through an online catalog, for items like gift cards, airline vouchers and hotel accommodations.

Many financial institutions also reward their debit cardholders for other relationships they have with the institution like a car loan, savings account, mortgage, etc., giving those customers the ability to earn additional points or other benefits.

It’s important to understand how you can earn points toward rewards: what purchases qualify, whether you earn points when you enter a PIN or sign for your purchases, etc. Make sure you ask these questions of your financial
institution, as policies may vary.

My comments: Reward programs are becoming more rare among credit cards, and even more so among debit cards. This is due to the state of the banking industry. I expect that once we definite signs of an economic recovery, and banks are concerned with making huge profits rather than avoiding bankruptcy, we’ll start to see more debit card reward programs. Until then, consider yourself lucky if you have a rewards program that you use to its fullest extent. Remember, banks that offer rewards programs do so to foster loyalty and above average use.

Question 6: To what type of consumer would you recommend debit cards over cash?

Response: Really, debit cards are a great tool for every one with a bank account. Some
of the benefits of debit over cash include:

  • Money Management and Control. Debit transactions are deducted directly from a checking account and recorded in one place on a monthly statement. This allows cardholders to easily track where every penny is going and better spend within their means.
  • Security. Debit cards offer better protections than cash or checks, and Zero Liability means consumers pay nothing for fraudulent purchases.
  • Acceptance. Debit cards can be used at millions of locations worldwide, and can be used over the phone and on the Internet.
  • Convenience. Debit card transactions are quick and simple, getting you out of the store faster; automatic bill pay via debit eliminates worries about missed payments.
  • Rewards. More debit cards are also offering rewards so purchases earn points toward travel, merchandise or even cash.

My comments: Visa is clearly focusing on the benefits of debit cards over cash, but the true showdown for those who use plastic is between debit cards and credit cards. The set of above reasons for choosing debit cards is a subset of the reasons for choosing credit cards over cash — and credit cards offer more protection, tougher security, broader acceptance, and more attractive rewards.

“Zero Liability” is a good policy, but if your debit card is stolen and used, your bank account can be overdrawn at a moment when you most need your balance to be there, like when your mortgage or rent check is cashed. Then you’re dealing with overdraft fees or bounced check fees and possibly other penalties. This is a deal breaker for me. I use debit cards occasionally, but I will avoid using a debit card as my main payment method.

I appreciate the representative from Visa taking the time to answer these questions. Are you convinced? What do you think about debit cards?

Photo credit: DeclanTM

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A “Computer Glitch” Caused Macy’s Customers to be Charged Twice

by Flexo on December 30, 2008

in Consumer

On December 22, a representative for Visa wrote about that company’s protection for customers who use debit cards:

If your account is compromised, Visa is committed to setting things right without further aggravation or inconvenience to you. Visa’s cardholder protection policy requires all financial institutions issuing Visa products to extend provisional credit for losses from unauthorized card use within 5 business days of notification of the loss. Many institutions will provide replacement funds even faster, sometimes within 24 to 48 hours.

What if the network or the merchant experiences a “computer glitch?” That’s doesn’t necessarily mean the account is “compromised.” But this is exactly what happened recently, although the problem appears to be due to the merchant rather than the network.

On Saturday, December 20, one of the biggest shopping days of the year, stores in Macy’s Central and East divisions experienced a period of almost two hours during which customers who completed purchases using a debit card were charged twice.

As a result, their bank accounts were debited twice as much as they expected, and as a result of this, many people were slapped with overdraft fees by their banks.

A Highland Village woman said her son bought her a set of knives for Christmas at Macy’s at Vista Ridge Mall in Lewisville [Texas]. She said he spent $78 for the gift, then later discovered that another $78 had been debited from his checking account. He was eventually charged $50 in bounced-check fees, said the woman, who didn’t want to be identified.

computer glitchFollowing, there was aggravation and inconvenience. She, like everyone else who was unlucky enough to use a debit card in this situation, had to fax checking account statements. The store would take up to 10 days before refunding everyone’s overcharges.

Will the store pay everyone back for overdraft fees incurred due to duplicate charges? It’s not clear, but I wouldn’t count on it. This is a real life example of why you should avoid debit cards or any agreement where you authorize a merchant to automatically debit your checking account.

Use cash to ensure you always have the money available for your purchase. You’ll be sure the cashier won’t take your cash twice. Use a credit card to ensure you have protection for fraud and “computer glitches” and to put another layer between the merchant and your bank account. Monitor your accounts frequently to make sure you don’t see any unauthorized or suspicious activity.

Photo credit: akz*
Macy’s owns up to debit card glitch on Saturday before Christmas, Dallas News, December 30, 2008

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Visa’s Take on Debit Cards

by Flexo on December 22, 2008

in Credit

A representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. I’ve written previously about five reasons to avoid debit cards, preferring credit cards for plastic payment. Here are three questions I asked Visa and the company’s responses. I have three more questions to post in the future as well.

What are your thoughts?

Question 1: With credit cards, the user has a chance to dispute fraudulent charges before their bank account is affected (through their payment of the credit card bill). With debit cards, any purchase made immediately affects a customer’s balance, and a fraudulent charge reduces the user’s available balance and increases the likelihood of an overdraft when it may not otherwise occur. How does Visa help protect the customer against this situation?

Response: If your account is compromised, Visa is committed to setting things right without further aggravation or inconvenience to you. Visa’s cardholder protection policy requires all financial institutions issuing Visa products to extend provisional credit for losses from unauthorized card use within 5 business days of notification of the loss. Many institutions will provide replacement funds even faster, sometimes within 24 to 48 hours.

My comments: The requirement of provisional credit within 5 business days is a benefit, but the delay can cause major headaches for people who keep their checking account balance high enough to cover expected expenses only. A provision credit can also be removed if the issue is not resolved within a certain amount of time.

Question 2: What other types of consumer protections does Visa offer to debit card holders?

Response: The Visa Check card offers better security protections than cash or checks. All Visa cardholders (debit, credit, or prepaid) are protected by Visa’s Zero Liability policy, which means you pay nothing if unauthorized purchases are made on your Visa Check cards or credit cards when you choose to sign for your transactions. While some issuing financial institutions also offer Zero Liability protections for certain PIN debit transactions as well, the best way to ensure you are protected is to sign for your purchase.

My comments: Unlike some credit cards, debit cards do not offer price matching guarantees or automatic extended warranties. Debit cards will never change interest or late fees, and there is a soft limitation to spend only what you have available.

Question 3: How is a debit card transaction that requires a PIN different than a debit card transaction that requires a signature? In some cases, merchants require neither a PIN nor a signature for the card to be accepted. Is one method more secure than the others?

Response: That’s a great question. Many of the benefits and protections Visa cardholders rely on, like Zero Liability protection, fraud monitoring, dispute rights and reward points, may only be available if the transaction is a “Visa” transaction, meaning it was processed over Visa’s network. The best way to ensure that Visa protections apply to the purchase is to sign (choose “credit”). Some PIN transactions are processed over Visa’s network, but merchants may use other payment networks that don’t offer the same protections. Cardholders should check with their issuing financial institution on their specific policies related to PIN debit transactions.

My comments: Be aware of competing priorities. When you’re shopping, cashiers often encourage you to use no-signature options, such as entering your PIN. This merchant pays less for this type of transaction than one that requires a signature. If your debit card has a Visa (or MasterCard) logo, choose a “credit” payment option to ensure you’re covered under the “Zero Liability” protections.

I have three more questions and responses to share. Do you have any reactions or comments about these responses?

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Wall Street Journal Podcast: Safe and Smart Online Shopping

by Flexo on December 8, 2007

in Consumer, Shopping

I mentioned the other day that I participated in an interview for a Wall Street Journal podcast, the Tech News Briefing E-Report. This service is seemingly accessible only to paid Wall Street Journal subscribers only1, but the RSS feed and the podcasts within are open to the public.

To listen to the podcast episode containing my interview, either subscribe to the podcast RSS feed and look for the item entitled, “The company that published TV Guide is being acquired…” or use this direct link to the audio [mp3]. Here are the time stamps relevant to the interview.

06:07 E-Report introduction
06:47 Checking security before using your credit card online
08:48 Shopping online with familiar offline retailer vs. online-only retailer
10:26 Shopping online with debit cards
12:12 Shopping online with PayPal
12:54 Offline retailers offering discounts when using store credit cards

Most of what I talk about is basic information about shopping online, but some of my comments about store credit cards may be controversial amongst people who give financial advice.

1 Update: Doobie has provided the link for the Wall Street Journal podcasts, accessible to everyone, including non-subscribers.

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