Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Kathy Chu reports on the overdraft fee scam, which currently generates nearly $40 billion in income for banks — by far their most lucrative source of fees and penalties:

Some consultants offered banks ways to boost overdraft and credit card revenue. A 2001 “checklist” from Profit Technologies — a firm that has worked with 19 of the USA’s 20 largest banks — has more than 600 strategies….One strategy listed to boost overdrafts: “Allow consumers to overdraw their … accounts at the ATM up to the bank’s internally set limit.” To increase credit card fees, banks can “delay crediting of payments not received in bank provided envelop (sic) or for which payment coupon is not received for up to 5 days,” and “remove bar coding from remittance envelopes,” slowing the payment.

….Has banks’ pursuit of profit gone too far? Ken Vollmer, 49, of Augusta, Ga., thinks so. He sued Wachovia this year, alleging it “purposely structured transactions to make money.” A merchant mistakenly put a hold on his funds, then the bank cleared transactions from high to low, triggering hundreds in overdraft fees, he says. Spokeswoman Richele Messick says Wachovia processes transactions in an “appropriate” way and will “vigorously defend” itself in the case.

Banks clear larger payments first, says Talbott, because they tend to be more important. But Douglass Colbert, who advised banks on overdraft and card strategies at Profit Technologies, says fees are a key driver.

“Banks will say (high-to-low clearing) is for the consumer,” he says. “Bottom line is, when it was pitched, we’d say … a side effect is that it results in more fee income to you because it bounces more checks.” Colbert says that after leaving Profit Technologies, he joined a credit-counseling firm and saw the damage fees did to consumers.

Just to make this clear: Say you have $100 in your checking account and four checks arrive at your bank in the following amounts: $15, $20, $30, and $150.  If you clear them in that order, the first three are fine and only the last one incurs an overdraft.  If you clear them in the opposite order, all four incur overdraft fees.  Ka-ching!  That’s why banks like to clear high to low.

In any case, if our Congress had any balls they’d fix this in a trice: simply regulate overdrafts as short-term loans, which is what they are.  The interest rates would be high, but nowhere near as high as the effective 1000%+ that banks charge now.  And it wouldn’t matter what order checks cleared.

Banks still have to make money, of course, and if overdraft fees went down then the cost of other services would go up.  But that’s fine.  There’s no reason that overdraft fees from their least prosperous customers should subsidize other business lines.  It’s better to charge everyone fairly and openly rather than trying to make outsize profits on the banking industry’s poorest customers.

And the chances of this happening?  About zero.  Why?  Don’t be silly.  It’s because the finance industry still owns Congress.

FOLLOW THE MONEY

Corporations and billionaires don’t fund journalism like ours that exists to shake things up. Instead, support from readers allows Mother Jones to call it like it is without fear, favor, or false equivalence.

And right now, a longtime friend of Mother Jones has pledged an incredibly generous gift to inspire—and double—giving from online readers. That's huge! Because you can see that our fall fundraising drive is well behind the $325,000 we need to raise. So if you agree that in-depth, fiercely independent journalism matters right now, please support our work and help us raise the money it takes to keep Mother Jones charging hard. Your gift, and all online donations up to $94,000 total, will be matched and go twice as far—but only until the November 9 deadline.

$400,000 to go: Please help us pick up the pace!

payment methods

FOLLOW THE MONEY

Corporations and billionaires don’t fund journalism like ours that exists to shake things up. Instead, support from readers allows Mother Jones to call it like it is without fear, favor, or false equivalence.

And right now, a longtime friend of Mother Jones has pledged an incredibly generous gift to inspire—and double—giving from online readers. That's huge! Because you can see that our fall fundraising drive is well behind the $325,000 we need to raise. So if you agree that in-depth, fiercely independent journalism matters right now, please support our work and help us raise the money it takes to keep Mother Jones charging hard. Your gift, and all online donations up $94,000 total, will be matched and go twice as far—but only until the November 9 deadline.

$400,000 to go: Please help us pick up the pace!

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate