Banks Are an Offer Many Families Can Refuse

In a recent column, Mitch Wagner wrote, "Every business -- except one -- strives to make things easier for users." But as bad as Internet publishers are, banks make them look like concierges. That's why banks are quietly heading down the road to oblivion.

In 2011, the FDIC surveyed US households to learn how Americans use banks. The result? Many Americans don't.

• Ten million households (8.2 percent) have no bank account. The number of unbanked households rose from 7.7 percent in 2009.
• Twenty-four million households (20.1 percent) are underbanked, versus 18.2 percent in 2009. They have accounts, but if they have a financial problem, they often choose check-cashing services, payday loans, wire transfers, or pawn shops.

Other industries have turned to the Internet to improve service or cut costs. Banks have used it to charge customers or eliminate overhead. According to IBM, it costs banks 9-15 cents to process a paper check. By contrast, it costs only a penny to process an electronic transaction. Nevertheless, banks often charge customers $5-$10 a month for online bill payment, calling it a premium service.

Unfree checking
Families once had a simple choice: Earn interest on deposits by keeping a minimum balance (with the risk of paying a fee for dropping below that minimum), or forgo the interest and bank for free. In 2006, 76 percent of zero-interest accounts charged no fees. Last year, that figure was 39 percent. Banks will waive fees if you meet certain conditions. But if your employer doesn't offer direct deposit (or you lose your job), you're zapped with penalties.

No statement for you
Four of the 10 largest banks charge extra to mail statements to customers. Banks let customers download statements, but nearly 32 percent of households (coming from the same demographic segments as the unbanked) don't have broadband Internet access.

Limited access
We're inured to banks being open only while we're at work. But their computers also keep bankers' hours. My top-tier bank won't transfer funds from checking to loan accounts after 5:00 p.m. on weekdays, or on weekends and holidays.

Another large local bank won't credit a direct deposit (which would typically run at midnight) until 8:00 a.m., but any charges received in the intervening eight hours post immediately. Deposits made after business hours (even if you work with a teller at a branch that is still open) won't post until the next business day. Depending on the amount and your balance, out-of-state checks (even from Fortune 500 companies) can take two business days to clear. Even bank wire transfers don't post immediately.

Noting these issues, a Consumerist blog post said people needing immediate, guaranteed access to their money might consider the fees imposed by check-cashing services to be money well spent.

Overdraft shafting
Unlike credit card companies (which decline transactions if you don't have credit available), banks process all charges -- adding a fee if your balance falls below zero. Last year, the median fee was $29, and banks collected $31.5 billion. Banks count on overdraft fees to boost profitability, so much so that they've ignored generally accepted accounting principles (in layman’s terms, committing fraud) to boost this revenue.

Let's test your banking aptitude. Suppose you have $50 in checking and make the following transactions during the day.

1. You pay $10 for breakfast at 8:00 a.m.
2. You pay $20 for lunch at noon
3. You make a $60 deposit at a supermarket branch at 6:30 p.m.
4. You pay $40 for dinner at 8:00 p.m.

Assuming that your overdrafts cost $29, what should your balance be at day's end, after your $70 of purchases and your $60 deposit? Reconciling all charges at the end of the day would leave you with a $40 balance. FIFO accounting would produce one overdraft and a balance of $11. At most banks, you'd be overdrawn by $18, because banks sequence transactions in the order that produces maximum fees.

• The $40 dinner check is paid first, dropping your balance to $10.
• Next comes your $20 lunch. That puts you at minus-$10, so the bank adds a $29 overdraft fee. New balance: minus-$39.
• Then the bank processes your $10 breakfast to take you to minus-$49. For processing this overdraft, the bank charges another $29 fee.
• At midnight, your $60 deposit (made after the 4:00 p.m. posting deadline) is applied to your minus-$78 balance, leaving you at minus-$18.

Since your balance is negative, each transaction processed the next day adds another $29 charge. What's most galling: Assuming you used direct deposit to get free checking, your bank knows more money is coming -- both the amount and the arrival date.

Sadly, that's not a hypothetical case. In the last year, five of the top 10 banks have settled class actions revolving around this practice, paying a combined $864.5 million. Many other lenders have cases pending.

Payday lenders, by contrast, seem beneficent. They're open nights and weekends. Some process requests online or by phone. They will serve you if you can present two forms of ID, a recent pay stub, and a checking account. They don't charge a loan origination fee. And you get a response in 10 minutes, not 10 business days.

Yes, the charges ($15 to $20 for every $100 advanced) meet the legal definition of usury. Since you repay the amount from your next paycheck, the annual rate is 200-400 percent. But if you can't pay, the lender will roll the balance over, adding another fee. It's more manageable than an endless series of overdraft fees.

Since bank online bill payment requires you to authorize payments one to four business days ahead of the payment date (so the bank can remove your money immediately, print and mail a check, and take advantage of the float until it clears), it's more convenient to go to your vendor to sign up for bill payment.

For many households, a bank provides only one service: a debit card, reloaded via direct deposit, that you can use to pay merchants that take credit cards. Considering the fees, it's an offer that a growing number of households can refuse.

Related posts:

• Banks Need to Be More Customer-Centric
• Banks Cope With the IT Revolution
• Muslim Hacktivists Give Banks a Break

— Geoff Beckman is a management, communications, strategy, and technology consultant based in Cleveland.