No business can stay in business if it cannot make a profit. If you started a business, would you continue to provide your service or products if you had to pay business expenses out of pocket? Of course, no! So when we discuss banking, we must first understand that banks are businesses, and the purpose of a business is to make a profit.
The service banks provide is to keep your money safe while it is in their care. Current and savings accounts are known in banking as DDA, demand deposit accounts. This means that when you deposit money into your account, you have the right to withdraw it from the account. But, understand, you can only take out what you put in.
Electronic banking (debit cards and ACH transactions) greatly increased the opportunities for NSF fees, because people became accustomed to using “floating” or “kiting” checks. Under the old manual banking system, the float could be 7-10 days for checks from out of town. If a check was sent to pay an invoice, it took 2-3 days for the payment to arrive. The company then had to deposit the check into his account at their bank, which meant it was probably deposited the day after he arrived. Then, if your account was at a different bank, your check had to be sent to your bank and was probably deducted the next day. So it was possible to easily have 3-5 days before the check on your account would clear. Most people knew this and had the time to wait a couple of days before depositing money into their account.
However, the bankers argued forcefully before Congress that the check should be counted as a day-before transaction because the recipient processed it a day or more before it was deducted from the payer’s account. This resulted in the federal law known as Check 21. It gave banks the right to process checks that had been presented for payment on a prior day as prior day transactions FIRST, before processing deposits and checks presented on the day of processing. This greatly increased the possibility of NSF fees for people who were counting on the “floater.”
Remember, checking and savings accounts are Demand DEPOSIT accounts. No client has the right to use funds that he has not deposited before the transaction. Until we understand and accept this, we cannot understand why NSF fees have become a major source of profit for banks.
Electronic banking has greatly increased the chances of overdrafts when transactions are completed before deposits. Debit card transactions used to be a huge source of profit for banks until Federal Law prohibited banks from charging overdraft fees for debit card transactions unless the customer opted out of that protection. ACH transactions are direct electronic deductions from a checking account. Preauthorized monthly transactions are usually ACH debits. If you forget you authorized a payment and the money isn’t there, here come the NSF fees.
Now why are the NSF fees so high? There are a couple of reasons why they are in the price gouging category. First, the courts and the government refuse to ban NSF rates. Why? I dont know. So it seems that the banks feel they have immunity to these fees and keep raising them higher and higher. Second, government banking regulations have eliminated many traditional sources of profit for banks, so they increase NSF fees to increase their revenue.
What can you do to prevent insufficient funds charges from being assessed on your account? It is a very simple principle. Never write a check, authorize a debit, or use your debit card unless the money is already in your account. This system always works.
It is unfortunate that the people who are least informed and disciplined in managing their accounts are the ones who contribute much of the income to the banks.
By the way, let me remind you how your debit card transaction can result in non-sufficient funds charges. Banks process transactions at the end of the day in this order: previous day’s credits, previous day’s debits; credits the same day, debits the same day. And they process the largest transactions first, then in descending order from largest to smallest. So, if you make a debit card purchase overnight for $100 and a check for $75 is presented for payment tomorrow, the debit card transaction will be paid first. Suppose your balance is $78…enough to cover the check. But, the debit card transaction is processed first, overdrawing your account. Of course, the debit card overdraft cannot be charged an NSF fee. BUT, the check for $75 will further overdraw your account and RESULT in an overdraft fee. Oh!
Now suppose that on the same day there are checks for $55, $32, $25, $19, and $5.00 also presented for payment. This will result in 6 NSF fees. Most banks have a policy of a maximum of 6 NSF charges per banking day. Very kind of you. If your bank charges $35 for overdraft transactions, you will be charged 6 NSF fees totaling $210. You have to deposit that amount into your account, plus enough money to cover the negative balance in your account. If you don’t do it within 90 days, most banks will close your account and send the full amount to a collection agency.
Would you like to have an active part in reducing the income of banks? You can!!! Just follow the principle: if the money is not in your account yet, don’t spend it. Responsible money management on your part reduces your contribution to your bank’s profits. Be happy!