For the last decade banks have manipulated debit card transactions so they could charge exorbitant overdraft fees, and their customers have been paying the price.
If you’re like most Americans, you use your debit card for virtually everything: a cup of gas station coffee, lunch and even bigger purchases such as home electronics. Banks know that many people rely on their debit cards and sometimes spend more than they have. That’s your bad. (Ours too, we admit it.)
But the banks, still reeling from the sub-prime lending mess, aren’t sorry about the overspending. In fact, quite the opposite: they took bold steps to profit from it.
Just last year, American banks collectively made about $29.5 billion in profits from overdraft fees. Part of the billions in profit was attributed to a simple manipulation in the banks’ policy to reorder transactions.
The scam was simple. Banks reordered debit charges from highest to lowest dollar amounts instead of keeping them as they should have been: in chronological order. The fees ranged from $25 to $35 each. While a single fee may have seemed insignificant, many unwary banking customers were charged dozens of times over for overdrafts they really did not have.
Here’s an example of how the scheme works: You started the day with $40 in the bank, and you had breakfast for $8, coffee for $4, and lunch for $15, but then bought gas on your way home for $35. You knew you would be overdrawn (your bad) and expected a $30 fee, but your monthly statement showed $90 in overdraft charges (not your bad).
That’s because the bank reordered the gas purchase to withdraw first so that three transactions would be overdrawn instead of just one. While ingenious for its simplicity, it was wrong, as Baron and Budd attorneys have proven in court, recently winning a $410 million settlement with Bank of America concerning this practice.
It used to be that we relied on banks to hold our money. Bankers were among the most trusted of society. But today, Mr. Moneybags is not just padding his own wallet; he’s taking the loose change from ours.