“Please Keep This Valuable Service”

By James Kwak

Here’s a letter submitted by a reader, originally from Chase, encouraging her to keep overdraft protection on her checking account.

There’s nothing particularly evil about this — banks will no longer be allowed to charge overdraft fees without your consent, and even I will concede that there are some people who might want this service, so now they have to ask for permission. Of course, it’s a pretty hard and misleading sell: they focus primarily on the issue of funds availability (deposits may not be available immediately), and they try to frighten you with “an unexpected emergency like a highway tow.” If you do get a letter like this and are not sure what it means, remember that the bank will not tell you when you are about to overdraw your account, and it will charge you $34 each time, even multiple times per day, no matter how small the overdraft.

I was interested to note that the bank doesn’t even promise that it will cover your overdraft — it says only that it may cover your overdraft, at its discretion. I suppose this makes sense, since they don’t want to cover an overdraft for $100,000, but couldn’t they guarantee it up to some fixed amount? I mean, if this service is supposed to give you peace of mind, how much peace of mind do you get when the bank reserves the right not to cover your overdrafts?

Of course, what banks really should do if they care about customers is come up with a way to give you a choice at the moment of purchase. Most people probably have a credit card or cash they would switch to if their checking account can’t cover their purchase, but some people might want the choice. In an ordinary competitive market, one bank would come up with such a service* and use it to take customers away from its competitors. We’ll see if that happens.

* Some people might object that this is a network issue that individual banks can’t solve. But I doubt that a little bit of creativity could not solve the problem. There must be a way for the bank to send a message back to the POS device — that’s how they reject transactions. They just need a way to get a tiny bit more information into that message, to the effect of “this transaction would overdraw your account — swipe again if you really want to do that.”

23 responses to ““Please Keep This Valuable Service”

  1. I can’t wait to get my letter. I’m about to close my Chase account – once the paychecks are going to the right place, it’s adios for me.

  2. Tellers at my bank were pushing overdraft protection on everyone who stepped up to the window last time I was there. In my case, my atm/visa card had been stolen and I went to find out why the card no longer worked as a debit card — that it could only be run as “credit.” When they sent me the replacement, the accompanying letter informed me that my new pin number would be coming separately. It never arrived. I called and they told me the local branch could encode the pin. The teller did this for me, I thought, but when I went to use it… same problem. Why don’t they want me to use my card with a pin? Is this the problem?

  3. Why doesn’t everybody, who can, do it? Vote with your bank card. Just don’t tolerate any such behavior by banks anymore.

  4. Because people are not that smart when it comes to such things. Ask them what they think about Tiger, though……

  5. the technology you’re proposing is exactly like a Starbucks gift card. I hope the banks have considered that method and maybe the problem is within the transactional system. Regardless, the logic seems like a sensible position for the consumers, but I doubt the banks would offer to reduce their overdraft charges. But maybe, all it would take is for one bank to effect this policy and the others would have to follow. But, since switching cost are considered to be so high for financial services, there would need to be significant scale needed for a bank to change policy.

  6. A rule of thumb: a paragraph that begins with “Of course” or “Obviously” is not obvious and probably not true.

  7. I have an account with a credit union, and they offer much, much better overdraft protection: you essentially qualify for a loan of a few hundred dollars, and then the loan sits, available, on your account. If you overdraft, they pull $100 out of the loan to cover it. You don’t pay any fees, and only pay interest (something like 8% APR) on the loan if you overdraft and until you deposit enough money to break even again.

  8. personally just seeing that CHASE logo letterhead sent fearful shaking cringes down my neck. it scared me when i clicked the link. i got all things CHASE out of my life and it is the most renewing action i have taken during my many years of life. they are an evil power on this planet.

  9. I got one of these notices and on the back at the very bottom line is a little asterisk that says if your account falls below zero during the month a $10 fee will be applied to your account. I think that is new.
    I’m moving to a local credit union. Which has 3 sort of forgiveness transactions if you fall below zero, then a $5 charge if you have the money in your savings acct to back up the screw up. That seems fair to me.

  10. Garrett Wollman

    Huh. I’ve had a small unsecured line of credit tied to my checking account for essentially forever — I got it when I first signed up for my account, three megamergers ago. I thought this was just a standard service that pretty much every bank of any significance offered. Occasionally it still comes in handy if I somehow forget to record a debit-card transaction (but of couese I immediately pay it off as soon as I notice that it happened).

  11. On each and every transaction that is processed through the interchange system there is a code passed back to the merchant terminal at the store. All that would be needed is a new code and proceedures around it.

    There is no money in it for anyone but the consumer, so it will never be done.

  12. I work as a teller for a regional bank in the midwest. I get the angry at all the big banks that take taxpayers dollars. But I don’t get the angry at banks for is the overdraft protection. I agree that people should have to sign into it, currently, my bank is just the default option. But as a teller, we get people who complain about overdrawing their account, and the first thing I ask is if the person keep a checkbook register, and over 75% is no. People have to have some level of personnel responsibility.
    We have customers who live on their overdraft protection. They know they do it but still do it, and for little thing too, no matter how much you tell them it cost.

  13. Denying a transaction is easy, but there truly is not a way to let the purchaser know that it would cause an overdraft. To do that you would need to rely on the cashier to relay that message – not the best method. And what about transactions where there is no cashier like purchasing gas at the pump. How are you going to relay that message, when all you can send back is approve or decline? You could possibly send an SMS mesage to a mobile phone associated with the card, but that is not a perfect science either. I have seen significant lag time between messages being sent and recieved. How do you think a delayed message would be percieved by a person who’s purchase was denied. They probably won’t see a delayed message as the cellular providers fault. Ultimately if you keep track of your spending then you won’t have a problem with overdrafts. This new legislation will not help anyone, it will just create a class of people who no bank will serve because they have occasional overdrafts. This is bad news for everyone.

  14. +1 to that! they should teach you that in school English class, every single year until we all know it by heart. I don’t completely mind aggressive marketing that is designed to pull on our emotional heart strings, but I don’t understand why we don’t recognize the need to armor our citizens against it as a counter balance.

  15. Same. I’ve actually got a fairly decent sized personal line of credit attached to me account. It was a standard option-service avail at my bank. It acts like one account so I don’t have to think about it. True peace of mind. I can go over and then pay interest on it as a loan, which stops when I go above board again, at better rate than my credit card. Certainly not all customers will qualify given the credit rating elements, but it seems a better win-win than ridiculously high charges and surely more banks should see that there is competitive advantage to supplying it.

  16. Gosh, maybe I’m behind the times. Maybe Greed is not still one of the deadly sins. But I don’t think so. Why would any upstanding, card carrying plutarch want to cover overdrafts from the riffraff they intend to serve so well? Answer: NEVER!!

  17. I grew up in the UK (now living in Los Angeles). Back home you get a service called overdraft protection, i.e. Say you want the ability to go $500 (thousands if your a student) over drawn on whats in your account you can! You don’t get a charge for it (like the $30 per purchase you do here), and you pay it back without interest. Also If you don’t have money in your account, the transaction won’t go through, so you won’t get charged. I think Banks in this country really take you for a ride. They let the Over drawn transactions rack up (sometimes putting the larger one through first to make you go overdrawn!) before they send you a notice. They expect you to ‘be responsible for your own finances’. Banks here really aren’t dynamic enough.

  18. Yeah, why provide a better customer experience when you can gorge yourself on rent-seeking behavior?

  19. It sounds like their computer application is seriously messed up or their tellers are poorly trained. If you bank at one of the biggies, adoption and upgrade of insufficient antiquated systems was one of the “efficiencies of size” that was introduced.

  20. Do you get incentive pay for signing up folks for overdraft protection?

  21. I’m trying to remember… someone mentioned a while back that banks might be intentionally holding back on pin-coded debit cards because they make less than when cardholders swipe them as “credit”.

  22. Nope, no incentive from overdraft protection. We do get incentive for opened account. We do it somewhat different from chase it sound like. Currently if you was to open up checking account for $100,(our minimum) you are given overdraft protection(we call it bonce protection) for $800. You can waive it if so choose. So if you want to say pay your mortgage, and couldn’t cover it, we would pay it from the $800, and charge you $35. Without, you get charge $35 for nsf and $10 return check fee, plus it doesn’t get paid, so you could be late on your mortgage or whatever bill you wanted to pay. As for debit cards, I don’t believe we deny charges either way.

  23. I have this same plan with my credit union. No fees, just a reasonable APR on any borrowed balance. This kind of service is exactly why I have always parked my money there. Really, in a modern age of credit cards, I think community banks and credit unions can actually provide better service than national or international institutions.