I think the thing that really annoys me about these kind of moves is that they're clearly targeting the less fortunate out there. If I want to avoid the $5 that's easy- I'll just switch to my credit card. But people who don't have enough credit to get a credit card now get punished twice.
I read a fascinating passage in The Big Short (an excellent book on the financial crisis by Michael Lewis) that told the story of a top banking exec boasting about the amount of money they made on "Free Checking" accounts. Far more than they made on the accounts they charged for, because the "free" accounts came with dozens of catches and fines that ended up costing the customer more.
There is actually something more fundamentally troubling about this new fee ...
it drives Americans to use more credit.
It was pointed out to me recently that this tendency towards credit that is really 'built-in' to the rules in our society, would probably end up doing us in one day. Sometimes you don't even think about it. I recall once, shortly after the onset of the financial unpleasantness that began in 2008, I was at an airport trying to rent a car. I thought, "Hey...I'd better start practicing what I preach!" So I whipped out a simple debit card, with more money behind it than the value of the car I was renting. "Nope...we don't accept debit...only credit". I thought, "That's a little strange...no wonder the financial system is taking a crap." I didn't have a lot of time, so I just did the credit card thing.
Point is, there are a large number of places out there that will not allow you to do business with them unless you are willing to go into debt, for however brief a period of time. When you consider the size of the US and the number of transactions being made every day...that's a little concerning.
Oh it does not. $5/mo is just a way for BoA to disincentive people from using their debit card.
It means more transactions get pushed through VISA network, more fees for visa, and probably a kickback for BoA.
My check card can also be processed as credit, and it usually is. This isn't because I'm buying things on credit, it's just that that's how it is being processed. The money still comes directly out of my checking account.
The bank likely won't care if you use your card with a PIN ("PIN debit") or with a signature ("Signature debit"), which you refer to as "processed as credit". Either way, they still know it's your debit card that was used even though PIN and Signature debit transactions arrive at the bank through separate networks, so you'll probably get hosed with the fee unless you're in one of their "premium" accounts.
Community banks and credit unions everywhere are licking their chops at the opportunity to siphon off disgruntled customers.
The fee structure for "credit" purchases is different than that for "debit" purchases. It's in the interest of VISA to have me run the transaction as "credit". Would it surprise you if there was cooperation between BoA and VISA (or any other CC provider) to encourage the use of this? The $5/mo charge just encourages it even further.
You're absolutely right, the structure is different for Signature and PIN debit. Pre-Durbin there was a large gap between Signature and PIN debit interchange income and banks wanted you to use Signature debit for that reason.
With Durbin rules implemented that gap has narrowed and now the bank wants you to use an actual Credit Card vs. a Signature Debit transaction because they will make more interchange income off of it.
>The bank likely won't care if you use your card with a PIN ("PIN debit") or with a signature ("Signature debit"), which you refer to as "processed as credit".
Mine does. They have a $1.50 charge whenever I use my PIN for non-ATM transactions. If I sign, there is no fee. It's been this way for the last 10 years I've had a debit/checking line with them.
I was speaking in terms of charging the $5/month fee. Pre-Durbin amendment there was a much wider gap between PIN and Signature debit revenue which is why the bank encouraged you to use Signature debit by surcharging you for using PIN debit.
One difference between debit and credit is when they do things like authorize payments, but then never actually capture them. When it comes to debit cards, some banks will pull that money out of your account, and not release it until may be 10 days after the authorize expires. On the other hand, these things can happen instantly (or within a day) on a credit card. Some people are rather annoyed when they do something like book a hotel room on a debit card, but then pay on their credit card when they checkout. The authorized amount disappears from their account for ~14 days and they think that they were charged twice (because their bank isn't necessarily transparent about this).
I know the standard when I've stayed at hotels that do accept cash (AKA Debit) they wan't $100 or more as collateral, I assume to avoid the whole problem you just described.
However, what I didn't know, which I soon realised was that the hotels pre-authorization hits like $500 on a room I pay $50 for a night. I found this out when I'd just moved country, had zero-credit, had a single $1000 visa card and was planning on putting a weekend away with my wife on credit so I'd have two pay checks in before I had to fork out the cash.
The worst was when we booked a campsite out of season. It cost us $14 a night and they required booking by credit card. They had $500 pre-authorized for over two weeks until we'd stayed, and I paid them cash. It's absolutely absurd.
Thankfully since the hotel incident we've always kept a burner credit card for things like this. I don't get the logic behind extending someone credit and then allowing it to be held-up in pre-authorization that will never get processed for the full amount when the credit could be spent at a restaurant or something.
Authorizing an amount, but never capturing it ('capture' is the industry term IIRC) is a hack on the system so far as I'm concerned.
1) I've gotten security calls from banks before just because some gas stations were authorizing the card for $100 prior to capturing for the actual amount of the gas. It even took the person on the phone a while to tease out that it was a $100 auth and not a $100 purchase.
2) The hotels a authorizing for a large amount because they want to make sure that you can pay for damage. They don't care if it goes on your credit. They get their money, then payment just becomes a matter between you and your credit card company. Note that not all hotels will authorize for $500.
> I don't get the logic behind extending someone credit and
> then allowing it to be held-up in pre-authorization that
> will never get processed for the full amount
Technically, the full amount can be captured until the authorization expires or they capture for a smaller amount. That is why. They don't want you to max out the card, and then have a $500 capture that they weren't expecting. Oops! You're $1500 in debt now on a credit card with a limit of $1000!
Maybe from the mile-high view, but the reason cash rewards work is because the credit card company is essentially sharing part of the fee they extracted from the vendor with the customer. Fundamentally different than interest on savings.
I wish to god I had the link handy, but I saw the "Rewards" programs explained in painful detail before and actually shows that the card companies do no sharing of the profit margin, the 1% or 2% comes out of the retailers pocket on the backend when the transaction is processed.
In this particular article it talked about that being the reason why some retailers discouraged processing charges with certain cards that have typically higher rewards.
Sorry for the hand-waving, I know that is the worst way to make a point... "This guy I know told me that his friend said..." :(
It is just interesting seeing it at work. I get 1% cash-back on all purchases, and 2% on some others. I've already save up quite a bit on my cash-back, more-so than I have earned in interest on my savings account with 10k+ in it.
I am not even spending an absurd amount, just what I need to survive, and bills.
Travel is very prone to this. Car rental, hotels, airfare tickets (sometimes). You also get car rental collision insurance with most credit cards too. Most car rental agencies will also allow you to put a deposit of several hundred dollars instead of a credit card.
It's any industry that is prone to customers doing massive damage easily, like crashing cars, trashing hotel rooms, etc.
Switching to the credit might not help. Some merchants charge more for credit card purchases (to cover the transaction fees). Well, technically they gave a cash discount to people not using credit cards because credit card association rules prohibited charging more than the advertised price to credit card users, but the net effect was the same.
And now, due to the Wall Street Reform and Consumer Protection Act 2010, credit card associations are no longer allowed to have that control, so merchants can instead advertise the cash price and add a surcharge for credit cards (ARCO just recently started taking credit cards, and that is what they are doing).
Furthermore, merchants can now charge extra to people using rewards cards. A lot of people don't realize this, but when you use a card that give cash back, or mileage, or points or whatever, the bank and credit card company do not pay for those rewards. They charge an extra 0.97% of the transaction amount to the merchant to cover the rewards.
This particular situation is more nuanced than the usual profit-from-the-poor story. Every bank and credit union receives these fees, and in the case of not-for-profit credit unions, the interchange fees truly support[ed] "free checking" accounts. Whereas merchants can lower their prices to pass the money back to the consumers (but won't), banks, conversely, have nowhere to recoup their losses except to charge the debit card users. I would rather see an honest fee like this than watch as overdraft penalties are raised to cover the lost revenue.
If you want to research a foul way of doing business, read up on Chexsystems and the collusion of major banks with national check-cashing firms. 20 years ago a consortium of bankers got together and essentially said, "if we build a credit-report system for bounced checks, we can limit our liabilities from poor people and make them give us 3-5% of their income by blacklisting them from all the nation's banks".
Blacklisting people who bounce checks seems a lot more reasonable than many other banking practices. Don't bounce checks; you're committing a form of fraud, providing a promise to pay money you don't have. I see nothing wrong with refusing to do business with people who regularly commit fraud.
Wow. I was in chexsystems for seven years. My fraud was that two automated payments to PG&E and Speakeasy bounced. Why did they bounce? A woman in a volvo ran a red-light while I was commuting to my stupid dot-com job, causing me to spend a month in the hospital, half of that in and out of a coma. I had no friends or family nearby to visit me, let alone to tend to my finances while I was incapacitated. I'm an engineer, I don't mind the $5k/year vig I had to pay to the loan-sharks (because banks won't turn large checks into cash if you don't have an account with them, even though they are valid checks written off of accounts with them). I don't mind having to go to the ghetto to visit these loan-sharks. I don't mind that I couldn't get a car-loan, a mortgage, student loans, a credit card, or a lease without a co-signer. I still survived, I just went through an incredible amount of stress and inconvenience. I still don't mind, life is suffering. I accept that.
What I do mind is the needless suffering my very poor aunt has to endure because of this extortion aimed at the poor. She nets about $14k/year, without health-insurance, from serving lattes to entitled engineers like myself. Of that $14k has to spend $700/year to the same loan-sharks. Her "fraud" was assuming that debit card purchases would be reflected instantly when she carefully checked her account before paying her utility bill two years ago.
She made a mistake that frankly she wasn't educated enough to anticipate was even possible. Now she's suffering needlessly for it.
For a person in the real world, you know the one who serves you your half-fat breve latte with a twist, foam and room, the system has refused to do business with her in order to extort enough money from her to ensure that she can't climb up any ladder.
There's a reason I said "regularly"; blacklisting someone who bounced one check seems excessively harsh. And I also consider it entirely unreasonable for any bank to refuse to cash their own checks, under any circumstances; I haven't run into such a bank but I can easily believe that they exist.
In any case, those sounds like two quite painful tales. There's a reason I don't set up automatic payments for anything (I prefer manually using online bill pay each time).
This is used to trap poor people. Joe Anonymous accidentally miscalculates the available balance of his checking account and makes a debit card purchase of gum for $0.99. His account balance is now -$0.23. PNC hits him with an overdraft fee of $25, and an additional daily overdraft fee each day until Friday (payday), bringing his balance into the negative by hundreds of dollars. Joe then has to choose between paying his rent and bringing his account current at PNC. After a month or so, PNC blacklists him and he can't open a bank account anywhere.
Not fraud as far as I can see. At least not on Joe's part.
With many banks, you can go to the bank and tell them to simply refuse payment of any overdraft, rather than granting it and charging you. Your card will then get declined if you don't have enough in your account.
The automatic overdraft "protection" scam was recently made illegal. Now you have to opt-in to have overdrafts covered.
Banks made a ton of money off of this, so this is another reason why they are trying to find new ways to raise revenue. At least a $5 fee is out in the open, and consumers can choose.
have relatives at another evil bank in another western country.
the way they tell it is that the bank really doesn't want the less fortunate out there as customers. if they could figure out a way to drop them without the public backlash they would.
Maybe the poor should start pooling their own money. For example, I heard about some system where a group of people all pay into a pot once per month, and they rotate through who gets the pot. It basically becomes a forced way of savings because there is peer pressure not to come up short. Though I guess this isn't fully a replacement for a bank, but I guess it could help people save up to a level that they don't have to be a 'bad customer' to a bank.
This makes sense to me. Revenues scale with deposits, but many expenses scale with number of customers. Below a certain balance, the bank actually loses money on each additional checking account - better for them if you just go somewhere else. Also, the less money you have in your account, the less certain they can be of the maturity of the loan you've made them. Given they can basically borrow from the fed for free, why would they want your money?
I read a fascinating passage in The Big Short (an excellent book on the financial crisis by Michael Lewis) that told the story of a top banking exec boasting about the amount of money they made on "Free Checking" accounts. Far more than they made on the accounts they charged for, because the "free" accounts came with dozens of catches and fines that ended up costing the customer more.
What a foul way of doing business.