Banks and credit card companies like to portray themselves as trusted friends, our partners in financial life. But the reality is that these financial institutions are profit-driven friends of convenience whose relationship with you is riddled with trip wires and fees contrived to extract just a little extra at every turn.
In the old days, the tradeoff was pretty straight-forward. Banks provided their services just so you would keep your money with them. You loaned your money to the bank so it could lend it to someone else for profit and they usually would pay you a nominal amount of interest.
More recently, banks have seized upon fees as a lucrative stream of supplemental profit. First they invented service charges for account "maintenance" or exceeding a set number of transactions in a month. Then, as their creative powers waned, they just began jacking up their existing fees.
The results are impressive, even if fee revenue is still dwarfed by interest as the top source of income for banks. Service charges doubled over the past decade, totaling $31 billion in 2004 among the nation's 8,855 regulated financial institutions, according to SNL Financial LC of Charlottesville, Va. By contrast, interest from loans and securities came to just over $400 billion in 2004, a gain of 25 percent since 1994.
The fee fest continued in 2005, totaling $25.8 billion in just the first nine months of the year, suggesting another double-digit increase.
This is not merely a rant against bank fees. It's more about the "gotcha" attitude that developed along the way. Consider, for example, this scenario: The automatic debit for your mortgage hits your checking account on the fifth of every month, the same day two small insurance payments of about $25 each are deducted automatically. Now, let's say one month there's not enough in the account for the mortgage, but enough to cover both insurance payments twenty times over.
So what happens? The mortgage payment bounces, triggering a $30 penalty for insufficient funds. Painful, but fair enough since it's your mistake. But most mainstream banks then employ some creative arithmetic, pretending you don't have sufficient funds for the two small insurance payments either. And because your bank is such a reliable friend, it will cover those payments as a courtesy, then add two more bounce fees, or $90 altogether.
The explanation isn't very convincing. It's common practice in the industry that when multiple checks or electronic debits are presented for payment on the same day, they are deducted from your account balance from largest to smallest. The rationale, banks say, is that the largest tends to be for important matters such as the rent or a car loan, as opposed to membership dues for the gym or a small IOU to a friend.
Putting aside that the monthly electricity bill and other critical payments tend to come in smaller increments, it's understandable that banks do need a system. But if there isn't enough in the account to cover the largest, and the bank isn't about to cover this presumably crucial payment out of friendship, there's no excuse for subtracting the bounced amount from your account anyway, conveniently creating the appearance of a negative balance.
There's no excuse, that is, unless the bank wants an artificial reason to boost fee income.
Then consider that what happens when, stung by this experience, you deposit $6,000 from a money market account with another financial institution to your non-interest-paying checking account just to be safe. A day later, you see the money has been deducted from your money market account, but you're told it won't be credited to your checking account for another six business days.
Well, if the money is gone from one account and it's not available yet in another account, someone's earning interest on your money, and it's not you. And even if there are no illegalities involved here, financial institutions sure look to be using the federal check clearing rules to their benefit.
Under federal law, a bank has to clear the first $100 of most deposits within one business day. It can hold the remainder of a local check until the second business day after the deposit, the rest of a non-local check for up to five days, and amounts greater than $5,000 for a "reasonable" number of additional days.
The purpose of these rules is to give banks time to ascertain the validity of a check and then transfer the associated moneys to one another. That process used to be time-consuming and potentially risky if funds were released too fast to a depositor. Nowadays, however, with the process streamlined and computerized, these check-clearing windows can be exploited by banks as a free short-term loan.
Banks, not surprisingly, contend their policies are fair and clearly communicated to customers.
Even so, with so many financial institutions gaming the system to work against their depositors, there seems to be a market opportunity for any bank that takes a less petty approach.