This blog normally steers clear of the consumer finance space, except when it is amusing or has macroeconomic effects. But once in a while I cannot contain myself.
Why does anyone have a debit card? I am deadly serious about this question. Not long ago, I switched banks, going from one end of the spectrum to the other. I had been with US Trust, which has great service if you are doing anything complicated and can live with their 9-5 schedule, but costly if your needs are more plain vanilla. They were bought by Bank of America, the good people all left, and I figured if I was going to be with a regular retail bank, I might as well go with one that was cheap, had 24/7 service and good branch hours, and I wound up at Commerce Bank, now TD Bank.
Commerce tried foisting a debit card on me. It took some doing to get an ATM card instead. I do not know why people use debit cards, so perhaps readers can explain this mystery to me.
If your wallet is stolen, someone can pretty quickly drain your account and even go into overdraft. Unlike credit cards, where your losses are limited, you have no recourse. Having had my wallet taken more often than I care to recount and having had the perps run up truly impressive credit charges charges in a mere 10 minutes the last instance (they seem to be getting more savvy over time), the last thing I would want to carry is a debit card. The ATM pin affords you some protection; you have none with a debit card.
Now that would seem to be a sufficient reason not to carry a debit card. Then we have the fact that banks charge particularly aggressive over-limit fees on debit cards. From the New York Times:
When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.
Peter Means’s bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward.
So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.
Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge…
This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.
In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.
I don’t get it. Debit cards are inferior to ATM cards (less security) and in some cases, higher fees (at my bank, if you have a line of credit established, you do not incur an overdraft charge if you go into the credit line). So why does anyone have a debit card? Is this a perverse example of behavioral economics, where the bank offers the worst “opt in” alternative (debit card) and consumers have to take the energy to opt out and get the better products?
And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:
Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.
Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.
Yves here. But we are already getting the usual defenses:
Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.
“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.
Yves here. I bet you he does not keep a running balance on his checking account. Back to the story:
Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.
Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.
Yves here. Garbage in, garbage out. Does not distinguish between debit card overdrafts and check overdrafts. The two are mingled. Back to the story:
For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.
“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.
Yves here. Favor? Banks are not in the favor business. This is an insult to the reader’s intelligence. Here is a key bit:
But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject…
Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.
Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.