The cost to overdraw a bank account could drop to as little as $3 under a proposal announced by the White House, the latest effort by the Biden administration to combat fees it says pose an unnecessary burden on American consumers, particularly those living paycheck to paycheck.
The change could potentially eliminate billions of dollars in fee revenue for the nation’s biggest banks, which were gearing up for a battle even before Wednesday’s announcement. Exactly how much revenue depends on which version of the new regulation is adopted.
Banks charge a customer an overdraft fee if their bank account balance falls below zero. Overdraft started as a courtesy offered to some customers when paper checks used to take days to clear, but proliferated thanks to the growing popularity of debit cards.
Oh, you’ve just scratched the surface… It was a truly fucked up algorithm they used.
First, they keep a running balance. This is the number they show you online, at ATMs, etc. this number includes all transactions in chronological order. It is not your available balance.. Your previous day’s ending balance is your “available” balance, but they hid that number from you pretty well.
Next, suppose you have a $500 overdraft limit. You deposit $900 on top of a $100 balance, and then go on a $700 shopping spree. If they processed your debits first, they would have to decline your $700 debit, because it exceeds your overdraft limit. Declining the transaction, they don’t get to charge an OD fee. If they apply the deposit in chronological order, you’ll have plenty of money to cover the debit, so they don’t get to charge an OD fee in that situation either. What to do, what to do… Got it! We can add the credit to the overdraft limit! That way the charge can go through now, and we can apply the credit later! So, we don’t have a $500 OD limit; with that $900 deposit, we have a $1400 OD limit! That’s plenty enough to cover your $700 charge, and let’s us tack on a $35 OD fee, too!
Next, they don’t just apply debits before credits. They also change the order of your debits.
Suppose you have $500 available. You make 20 $20 purchases ($400 total) and deposit $500 on Friday night. Your balance Monday morning is $100, with another $500 pending. You use your online bill pay to pay your $500 rent on Monday.
On Tuesday morning, you expect your balance will be $100 with $500 pending debits and $500 pending credits. Worst case, your rent payment accrued an OD fee, right?
Wrong. They moved Monday’s rent payment to the top of the stack, even though it won’t even be mailed out until Wednesday, and won’t actually be cashed until Friday at the earliest. $500 off a $500 balance is zero. Now they start counting the 20 transactions you conducted last Friday night, with an OD fee on each and every one.
It wasn’t just BOA that did this. It was all major banks, most regional banks, most credit unions. Basically, everyone did it, until they were finally slapped down about 15 years ago. Fuckers.