Debit card fees are a step in the right direction

October 4, 2011

There is no free lunch. But there is lunch somebody else pays for. There’s nothing wrong with somebody else buying your lunch—so long as they know they’re buying it and you know what they’re going to expect in return.

Prior to the passage of the Dodd-Frank bill, some of the large banks made huge amounts of money off the a group they called their “OD/RI customers.” That’s Overdraft/Returned Item. This was a group of vulnerable borrowers who would routinely overdraw accounts and be assessed absurdly high fees.

One of the more common ways the accounts would be overdrawn was when banks changed their debit card rules to “shadow line” of credit that permitted overdrafts on point-of-sale debit card purchases. In other words, if your balance was low and you wanted to buy a cup of coffee, rather than declining the card, the bank would let it go through … then assess a $29 overdraft fee. (They also took to rearranging purchases from high-value to low-value so that if you bought the coffee on Friday with a positive balance and a rent check cleared on Saturday that brought the balance negative you would be hit with two overdraft fees rather than one.)

I once saw a couple whose only income was Social Security incur over $4,000 in overdraft fees over a year and a half. (Thanks, Fifth Third!) Because their money was automatically deposited at the beginning of the month, there wasn’t really a credit risk. The bank was just grabbing their money. And, when you’re grabbing that kind of money from the most vulnerable borrowers, you can afford to give free debit cards to everybody. And, since there weren’t real limits on how much merchants could be assessed for debit card purchases … the banks could get a bit of extra money that way.

New debit card rules have changed both the Point of Sale rules and the amount that can be assessed for interchange fees. I generally think that the banks will still come out okay. And I think the debit card fees will simply push more people to use more checks—which are much more expensive to process than debit cards. Or, even more likely, people will just close accounts at the banks charging fees.

But if users of debit cards need to pay a monthly fee to make the service viable, at least the right person is paying. You don’t have a right to make somebody else buy your lunch.

hmmm

5:28pm | URL: http://tmblr.co/ZmCeYyAHfHUX

(Notes: 69)