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Check Processing & Payments Information

Overdraft Fees and Payment Processing

Posted by Brandes Elitch | Thu, Jan 12, 2017 @ 11:28 AM

payment processingRecently, The Pew Charitable Trusts released data it collected on the subject of overdraft fees. Nobody seems to be happy with overdraft fees in payment processing, except for the banks that charge them of course. How happy are the banks? Well, would you believe that fully eight percent of the total net income for all U.S. banks was attributable to overdraft fees? 

How can that be? you ask. 

Banks have enormous spreads from making loans, virtually free deposits (CDs are paying 1%), hugely profitable credit card portfolios which revolve at 14-21%, trading and investment income, and fee-based income from other services such as treasury management. 

Overdraft fees are indeed big business. According to Bloomberg Intelligence, the 8% equaled $11.2 billion in 2015 net income for U.S. banks.

As Senator Everett Dirksen once said, “A billion here, a billion there, pretty soon it adds up to real money.” (Actually, there is no record of Dirksen saying this, but it is believed he said it during an appearance on The Tonight Show starring Johnny Carson). 

Banking Practices Past and Present

What is particularly interesting from this study is the statistic that the average debit card transaction triggering an overdraft is only $24, and most banks charge an overdraft charge of around $35! So if you use your debit card for a $24 dollar transaction, and you overdraft your account because the three checks you wrote last week cleared today, you are really paying $129 for this item!

payment processingThe Pew study looked at four large banks and their policy for handling overdrafts. J.P. Morgan Chase bans ATM overdrafts (ODs), but charges a fee for debit card overdrafts. Bank of America does the opposite; it bans debit card ODs but allows ATM ODs. Not much consistency here. 

This is actually a pretty simple problem to solve as consumers have to opt-in to have overdraft coverage. If they do not opt in, the bank can simply decline to pay. Another way to handle this is to keep money in an overdraft line, which will automatically cover an OD as long as sufficient funds are there. The Pew survey found that over half of the consumers who signed up for overdraft protection didn’t remember doing so.

In the past, some banks engaged in a practice where they would order the checks that were presented against an account by ranking them from highest to lowest. That way, there was more likelihood that the biggest check would bounce first, and then of course all the smaller checks that were processed next would bounced, so the consumer might have a hundred dollars in bounced check charges in just one day. Talk about having a bad day. 

Breaking from the Payment Processing Pack

Many of the people we call “unbanked” or “underbanked” have had this thrilling experience and subsequently closed their bank accounts. Now they pay with a service such as GreenDot which they find works much better for their banking needs and allows them to sleep at night. These people are not so much underbanked as they are careful at managing their balances.

Now you might think that this is just a small fraction of consumers, but a current study by the Fair Isaac Corporation (FICO) shows that there are 53 million people who are outside the traditional banking system. This includes “credit retired” (7 million), "credit impaired" (18 million), “new to credit” (3 million) and “no traditional credit file” (25 million). 

Consumer Credit Cards

To be fair, the FICO study just concentrates on the availability of credit, typically for an unsecured credit card, not just a bank account. The card brands always say that “everybody has a credit card,” but a 2014 Federal Reserve report (p29) shows that only 72% of consumers (167 million) have at least one credit card. (This has always been the case, so it is possible that the card brands have been exaggerating all this time.) 

This means that the universe of consumers is 231 million people, so if 53 million are credit impaired, this is actually about 23% of the population. Please keep in mind that these consumers still need to get their car repaired to get to work, or pay the vet to take care of the dog, or buy a new washing machine. Whatever the situation, they just have to find a way to pay for what they need. 

Now you might think that banking is a pretty simple business, and that bankers just make money from the spread between their cost of funds and the prime rate, or LIBOR, or whatever formula they charged the borrower. This used to be called the “Banker’s Four-Eight-Three” formula: take the money in at 4%, loan it out at 8%, and be on the golf course by 3 p.m. But things have changed since the Glass Steagall Act was repealed. Large money center banks, and there are about a dozen major ones, have diversified their business units into a variety of products. In general, this has not ended well for these banks, although we should be clear that these problems did not occur for the other 99%+ of the roughly 5,000 commercial banks in the country. 

Banking Fines

Some big banks charge overdraft fees because they need to pay out considerable fines as a result of their activities leading up to the mortgage crisis, including fraud, toxic securities and loan and foreclosure abuse. Banks have agreed to pay to settle allegations of rigging markets including credit derivative, foreign-exchange, LIBOR and commodities. 

For example, six years after the crisis, Bank of America had 51 major legal settlements, judgments and regulatory fines, all adding up to $91.2 billion in damages. This number, ninety-one billion dollars, shocks the conscience. You have to wonder what their board of directors is doing. 

So perhaps we should be resigned to banks charging overdraft fees. The numbers are too important to just go away. Perhaps as more consumers do mobile banking, and use apps that keep track of their balances and outstanding items due today, they will be more prudent at managing their payments.

Did you know that when a merchant deposits a consumer’s check that bounces, the merchant’s bank will charge the merchant a bounced check fee too? And if the check is redeposited and bounces again, the merchant will get a second charge? So if the merchant is depositing a check for $100 and it bounces twice, he might get a charge of $70 and not even collect the funds on the check. As William Bendix might say, “What a revoltin’ development this turned out to be!”

CrossCheck can help both merchants and consumers in a couple of ways.

Payment Processing without Penalty Fees

When merchants use the CrossCheck Remote Deposit Capture (RDC) product, the funds settle in the CrossCheck account, and we push an ACH credit to the merchant whether the check bounces or not. The merchant is always kept whole, and they don’t incur a bounced check charge either. No more “return deposited entry” charge on their account analysis. Merchants really like this.

But also important is what we do for the consumer, who really, really needs to buy that used car (because the old car finally just gave up the ghost), or get their transmission fixed, or go to the dentist to get rid of a toothache. CrossCheck to the rescue!

During these tough times, we let the consumer pay with as many as four installments and we let them choose when those deposits will take place (this is our Multiple Check service). We don’t make the consumer apply for credit or pay interest. They know when they are going to get paid, so they get a little extra time to make those payments, and they don’t incur an overdraft fee if they plan it properly. 

Now you know about overdraft fees, so you might to ask your bank about their home banking product, so you can reconcile your checking account every day. And for merchants, there is CrossCheck, so you don’t miss a sale and don’t get an overdraft charge from the consumer’s bank. Download our brief RDC webinar to learn how it can help your business with "check processing made profitable."

 

remote deposit capture, RDC, check payment processing

Topics: Brandes Elitch

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.