The Secret Life of Bank Fees

Posted on April 25, 2010
Filed Under Bank Fees

Did you know that for years now the revenue generated for banks by their banking fees has been on the rise? It used to be that banks made the vast majority of their income from the interest they collected on the money they lent to home buyers and businesses. Now however, they make a great deal of money from the bank account fees they charge (bank accounts and credit cards). So much so that it amounts to almost half of their total revenue.

But how did this come to be? Well, it didn’t happen overnight but rather by a steady progression of incremental fee followed by incremental fee. Sometimes I picture a board room somewhere where a group of executives brainstorm ideas back and forth trying to come up with new ways to levy fees on their customers. In my daydream the executive that comes up with the best money-making idea gets a corner office and a brand new title. I wonder if that’s really not actually close to the truth.

In any case, my favorite from a long list of bank fees has to be account overdraft fees. And it’s for no other reason than the genius and simplicity that went into implementing it. It really is a thing of beauty. Here’s how it works.

You have $200.00 left in your account until payday but you need to pay for a few things. So you go out with your shiny bank debit card and buy a half-tank of gas, a small load of groceries, a couple things at the hardware store, and maybe a cup of coffee and a bagel along the way. Then you come home and need to pay a scheduled bill like your car insurance.

You know you’re short on the insurance payment so you schedule an online payment to hit on the same day your paycheck is automatically deposited into your account. The scheduling is tight, but not as tight as your budget nowadays so you grin and bear it. You hope you won’t get an overdraft fee, but you’re prepared to accept it if you do.

What happens next is interesting. You see your bank doesn’t process your transactions in the order in which they occurred. Rather, they will hold them and group them together. Then they’ll be processed in a highest to lowest amount order. That means your insurance payment hits your account first which wipes out most of your balance. Then your groceries are charged which probably takes you into negative balance land so bang, you’re hit with an overdraft fee. Then the gas charge follows, bang, another overdraft fee. And lastly the coffee and bagel charge gets the same treatment. In all, you rack up three overdraft fees not one and that coffee and bagel end up costing you $45.00!

This is known in some circles as “high/low” processing. In order for banks to get away with it, they need to treat each debit card transaction as if it were a check. And they need to hold the transactions in a pending mode for some period of time before they process them. By doing it this way they maximize the number of overdraft fees they can charge and of course maximize their revenue along the way. Doesn’t seem very fair does it? But is sure is smart.

To protect yourself against this kind of shady practice and avoid bank fees for overdrafts, you can do some things.

First, examine whatever kind of “Protection” service you’re signed up for at your bank and consider opting out of it. These types of services try to make you believe they’re doing you a favor by not bouncing your transactions when you’re over your limit but they open the door for this kind of practice.

Second, sign up for your bank’s particular flavor of balance alerts. They can be email alerts or text messages, doesn’t matter. What’s important is that you keep track of your balance consistently. It would also work if you simply examined your account online every day with your morning coffee. The point is to know what’s cleared and what hasn’t, and to make your spending decisions accordingly.

Third, try to link a solid savings account to your checking account. In that way if you draw short on your checking account, the bank will automatically transfer money from your savings to cover it. Keep in mind though that the bank will charge you another (wait for it…) fee to make the transfer. That fee however will be much lower than an overdraft fee.

Lastly, you could switch financial tools. You could get yourself a reloadable debit card. Prepaid debit cards won’t let you overspend because you load them up first and spend down the balance after. When your balance runs down you need to reload them before you can spend more. You won’t get an overdraft fee with a prepaid card. There are other fees with these cards, but they’re much more straightforward than bank fees or credit card fees.

Boy, you’ve got to watch your nickels and dimes nowadays. It’s always been good practice to do so but now it’s becoming a necessity because you never know what kinds of bank fees you might be hit with next. In a funny way our economy and financial situations are forcing us all into becoming fiscal conservatives. That’s probably a good thing though because who in their right mind would want to pay $45.00 for coffee and a bagel?

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