The shoe that fits one person pinches another.
Carl Jung, Modern Man in Search of a Soul
It is easy to forget that next to dogs, banks are man’s best friend even though, from time to time, they bite. That was brought to mind this spring when it was reported that some banks in California were ignoring a California law that requires them to notify customers in credit card statements how long it would take to pay off credit card balances if only the minimum monthly payment were made. California was asking banks to put a short notice on credit card statements that would say something like: “If you continue to make the minimum payments on the above balance and the unpaid balance does not increase, this account will be fully paid in 900 months.” (Of course, the number of months will vary from account to account. Some accounts may require many more months before they are paid off depending on the interest rate, the amount owed and the minimum required payment. Banks tend to keep required payments low so that customers can continue to buy happiness with their cards.)
That was not the only disappointing news from banks in 2003. According to a report in the New York Times, at least 1,000 banks are encouraging customers with low balances to overdraw their checking accounts. That practice enables banks to skirt credit laws and collect billions of dollars in new fees from the poor. One consultant advised his bank clients to open branches in supermarkets that had middle to down market customers.
Whereas credit card credit interest charges are typically 20% or less, the overdraft fees can be hundreds of per cent, depending on the size of the overdraft. It is not unusual to find banks that impose a flat fee of $20 to $35 for each overdraft irrespective of its amount. Thus, if a $5 check creates an overdraft and a $35 fee is charged, the interest is 700 per cent on an annual basis. Since the overdraft must usually be repaid within a week or two, the rate is even higher. As bad as that may sound, it’s not being done out of malice.
According to Joe Gillen, CEO of Pinnacle Financial Strategies, which helps banks create the overdraft and other income generating programs: “It allows the consumer to have another alternative to manage their funds.” The program allows them to avoid the inconvenience of bouncing checks. In the old days banks said high overdraft fees were didactic devices that encouraged people to use their checking accounts responsibly to avoid the fees. Today the fees are described as a convenience to customers. They are not without benefit to the banks, however.
Bank fees have increased 24 per cent from 1997 to 2001. Banks will earn $30 billion in A.T.M., bounced-check and overdraft fees this year or 30 per cent of their operating profits. Banks that aggressively market the service generate as much as $150 per account in overdraft fees. Low and middle-income consumers are the ones most likely to pay the fees since they’re the ones most likely to have overdrafts. Nonetheless, news of customer gouging masquerading as institutional benevolence does not prevent the truly compassionate from feeling a touch of sympathy for banks when their own tactics are turned against them.
In early August it was reported that Bill Cooper, CEO of TCF Financial Corp., the parent of TCF bank, thought he was being held up by Visa USA Inc. He reported that Visa plans to gouge banks in a way that can fail to offend only the most insensitive among us, including banks.
Visa has advised TCF that it, and other banks, may have to pay as much as $10 to $20 million if they decide to switch to a competitor such as, for example, Mastercard. The fee is called a “settlement service fee.” Visa has promised to impose the fee on any of its largest check-card issuers whose sale volume drops by more than 10 percent within a year. According to reports, a 10% drop could only happen if a bank were to change its allegiance from one credit card issuer to another and it is such a display of disloyalty that Visa hopes to discourage. Another (but purely incidental) reason it is being imposed is because of a settlement recently entered into by Visa and MasterCard with retailers who successfully claimed that those two companies were charging excessive fees on debit card transactions. Visa is responsible for $2 billion of the $3 billion settlement and in addition to encouraging loyalty, the service fee is designed to protect it should debit card volume decline as a result of the settlement.
TCF is one of Visa’s top debit-card issuers. According to Mr. Cooper, TCF enjoys $4 billion a year in volume from 1.4 million debit cards. The settlement that the debit card issuers entered into will reduce TCF’s debit card fees by $15 million a year. Mr. Cooper does not think the fee is fair. He thinks he should have the freedom to choose. MasterCard agrees. Alan Heuer, a senior executive vice president for that company said: “Restrictions of this nature take away members’ freedom to choose and are inappropriate and antithetical to free markets.”
There is one thing to be said for imposition of the fee. It will help banks develop empathy. Now they know how we feel when we are being gouged by our banking friends. It will probably make them more sensitive.
CHRISTOPHER BRAUCHLI is a Boulder, Colorado lawyer. He can be reached at: brauchli.56@post.harvard.edu