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Interview: Bill Strunk

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A Texas banking consultant, Strunk popularized the idea of free checking accounts and allowing customers to overdraw them -- and when they do, they're charged a fee. When banks started attaching debit cards to those free checking accounts, profits from overdraft fees soared. This is the edited transcript of an interview conducted on Sept. 1, 2009.

You came up with the idea of check overdraft privilege. What is that all about?

Previous to 1994, when I sold my very first one, banks used to [process overdrafts] on an ad hoc basis. They would just circulate a list around the bank and say, "Hey, do you want to pay Peter Duffy overdrafts, or Mary Lou Barnes, or whatever?" If they approved it, they would pay it. If they disapproved it, they would return the check, "insufficient funds."

I used to ask them, "Well, who makes these judgment calls, and how do you do that?" And I found out that they didn't really have any policies. They did the overdrafts for people they knew -- loan customers, people they went to church with or played golf with at the country club. And it was unintentionally totally unfair. And it just didn't make any sense.

And in 1994 you say things started to change because of credit cards?

And payday lenders and stuff like that. And bankers didn't want to turn these people away. [But] there was just no way of doing this --

Doing small [loans]?

Small loans. Because [the banks] did them for years, and 90-day notes and so forth. But [the banks] just didn't have a way to make money from it. Then the credit card came along, and that was the way of advancing people some money, and that was in the '70s.

So I thought about this thing a lot: consumer demand for short-term financing that the bankers didn't realize. ...

As long as you keep your account in good standing, [which is] defined as making regular deposits, you bring your account balance back to a positive position every 30 days or less, as a noncontractual courtesy -- that's a big word -- we're going to consider paying your checks up to $300 to $500 in the overdraft.

You used two words in there: "noncontractual" and "courtesy." Why those two words? Why not just simply say, "We're going to make a deal with you"?

Because we didn't want it to fall under other TILA regulations, and so forth, about lending.

That's the Truth in Lending Act?

The Truth in Lending Act. We didn't want to do that. And there was a court case here in Houston that went to the U.S. Supreme Court, ... and the Supreme Court ruled that it's perfectly legal for banks to do this and charge a fee for it, because it was a handling fee. It had nothing to do with interest rates or anything else. We just had to explain it. That's why I came out with a policy.

The key to this was that you developed the first written policy for your clients, the banks, in '94, and that it was written in such a way that it would stay within the limits of being a fee-for-service as opposed to interest on a loan?

Right.

Why can't it just be an interest on a loan?

The number one reason is that the consultants back in the '60s and '70s were correct: You cannot make money off of a short-term $300 loan, no matter what interest rate. ... It's because of regulations. Lending money requires so much paperwork and so much credit checking and so much overhead expense for a financial institution that it's just cost-prohibitive for them to do.

Before this kind of overdraft protection or privilege, as you put it, came into effect, what happened when somebody wrote a check and had insufficient funds. It would bounce, right?

It would bounce.

Let's say the check is to a big retail merchant like Wal-Mart. What happens is, a bank back then would charge $20 to $25. Now it's $30 or $35. It would go back to Wal-Mart as insufficient. Well, two or three things happen. One, they would notify me, the consumer that wrote the $100 check, that I have to go down to Wal-Mart and make good on the check. The bank charged me $25.

What Wal-Mart [finds] out is that most people live paycheck to paycheck, which is the premise I've always worked under, and it's true: Ninety-five percent of the people in the United States live paycheck to paycheck. They would send it back for re-presentment to the bank.

They would send the check back a second time?

Exactly. Everybody did that. Why? Because most insufficient-fund checks -- it's not instantaneous like it is today. It would take several days [before] the money would be in the account. Well, if the money's not in the account, the bank charges them again -- another $25. ...

So what you saw 20 years ago was that people were writing checks. If they bounced, they would often have to pay more than one fee to the bank, plus to the retailer.

Plus late fees. ... So I'm saving them the $30 or $40 merchant fee and the late fees -- and let alone, you know, it's not a nice thing to go home to your wife and tell [her], "Well, they bounced my check."

And don't forget that the merchant is going to cut you off. So if [your wife] shops at Safeway, well, when she goes to check out, they'd say, "I'm sorry, ma'am; you've got to put the groceries back."

It's very humiliating and embarrassing. So I just took that and developed a process to inform members of credit unions and bank customers, "Here's what we're going to do."

It did two things. One, it saved the customer money -- the merchant fees we just talked about. Two, it was great service. Three, I did it for everybody. Until you abuse the rules, I'm going to give you this privilege.

And that goes back to the $300 loan. What do people do? It's Friday, and the generator in your car goes out, and it's going to cost you $600 or $500 to get it fixed so you can go to your job Monday morning, and you don't have an extra $400 in your checking account.

Well, I know what you're going to do. You're going to write an insufficient-fund check. And it's really all about better service for more customers. That's what it's really all about. ...

And consumers know about this thing, and the same people overdraw their account all the time. That's just the way they live their life, you know? ...

It doesn't matter how much you make; it matters what your needs are. And people that make more money just spend more money. It's that simple.

So what you're saying is that by starting to put these policies in place in 1994, in a way, you democratized the overdraft check business.

Yeah, and we mail it out to everybody. It's at the New Accounts desk. We made a brochure about it. We fully disclosed this thing.

So I understand now how the check overdraft part of this works, but then you have the introduction of ATM cards and debit cards.

I did both of them. Go ahead.

How did it start, and how did it change things?

Well, in the beginning, what we used to do is post a sign at the ATMs, just like it does for a surcharge -- "Are you aware that this is going to charge a $1 surcharge fee to your account?" -- before you do the transaction.

So we did that with the ATMs. I had to show the different data processors who drive ATMs, which is not all the data processors, how they could do that technologically and then come up with a screen that says, "Mr. Strunk, are you aware that this is going to overdraw your account and you're going to be charged $25?" That's how I did it. Then it led to point-of-sale debit cards. ...

So we did it for convenience reasons with the debit card. ...

You didn't always allow the authorization of an overdraft?

Right, I didn't do that at the ATM or the point-of-sale. I just had to develop the policies, procedures and the technology on how to do that.

Before that it would deny the sale or deny the withdrawal.

Yes, it would. It would just turn you away. And they didn't charge you a fee for the denial. That's true.

In fact, they didn't charge fees in general on ATMs or debit cards until relatively recently. That really didn't take off until about five or six years ago, correct?

That's correct. ... It's meant to be punitive. It's meant to punish you a little bit.

And you say you transformed a punitive practice? What do you mean?

Back in '94, the average bank in the United States charged $10 or $15 for [the overdraft fee]. And every three or four years, they increased the prices. Well, that didn't work out.

When you went to $15 to $20, it isn't like everybody says: "Wait a minute, I'm not going to pay you $20 for it." No, they just kept doing it. That's just the way they do business. And I repeat, it has nothing to do with income, because there are emergencies that come up. Your car is broke [sic]. ... I did this in Plano, Texas -- at the time, Plano was the highest income county in the state; it's a suburb of Dallas -- and it worked like gangbusters.

Worked in what sense? Because the customers were happy?

The customers were happy.

The banks made more money.

Yes, two things. The whole purpose behind this thing is to create better service to your customers. It's gotten carried away in some places. Do some banks abuse it? Probably. But for the most part, it's just a great service. I have 2,000 clients. I have not [had] one client ever, since 1994, that canceled this program, saying, "My customers are complaining; it's abusive," or anything like that.

So today it's a $35 billion-a-year business -- all of that just fees.

Yes, right.

And the amount of money that we're talking about, that the bank has lent or granted to the customer, the median is apparently $20, according to the FDIC [Federal Deposit Insurance Corp].

No, they're wrong. I've never seen that statistic. The average insufficient-fund check is for about $78, so they go in a negative balance for $78, plus the $30 fee.

Well, even taking that number -- 70 and 35 -- and you expect to be paid off within how many days?

Thirty days.

That's a pretty high APR [annual percentage rate].

Well, I don't know, because that depends on how soon you pay it back. The APR is different if you pay it back in four days, five days or 28 days or 30 days or 45 days.

Well, then, 30 days.

I don't know what the actual APR is on that. I never have figured it out. I really don't know. I've never had to calculate it.

You haven't heard people say it's like 1,000 percent or 2,000 percent.

I've read that, and it's probably true. That's probably true.

So the question really is, then why do it that way and not simply give people a line of credit that, let's say, has an 18 percent interest rate on it? Then it would be pennies as opposed to --

Bankers have had that for 30 to 40 years. They have lines of credit. It's just that most people don't qualify for them. The average bank of the United States has about 5 percent or 10 percent of their customers, or credit unions in that arena, that have their line of credit.

And who do they give that to? The people that don't need it. You know, I don't need overdraft privilege, or I don't need the line of credit. Why?

You haven't bounced a check recently.

Because I haven't bounced -- I bounced a check when I was younger. See, a lot of people that live paycheck to paycheck are younger people. Why? Because you don't make a lot of money when you're younger. You've got a lot of credit needs when you're young. You've got to buy furniture; you've got to buy a suit to go to work, lots of things.

It has nothing to do with your income. It's just your lifestyle, and now it continues on in some people.

Well, the research that I've seen says that most people who avail themselves of this privilege or facility are elderly, young or, generally speaking, a lower income.

I would say most of them are young, not elderly. Most elderly people don't write insufficient-fund checks. I didn't say nobody does, but very rarely.

You've seen the research that says if it weren't for these overdraft fees and over-the-credit-limit fees, banks wouldn't have made money last year at all.

They probably would have made some. But it's becoming a larger portion of a bank['s], and certainly a credit union's, income. See, credit unions are all consumer-driven. Banks have commercial lending, so it's more on a credit union side than it is on a personal side.

Do I think that's bad? No, I don't think it's bad, because what's happened is regulation has squeezed margins so much, they don't make much money in the lending business anymore. ... So they're gonna make it in non-interest income.

So as the income from credit cards and other lending has decreased, this fee income from overdraft --

Has increased.

A policy that you pioneered is now, in a sense, the profit center.

Yeah, it is. ... It's a great service for these people. They love it. You don't see any consumers going to Capitol Hill and saying, "This is a terrible program; it's awful."

Well, the lobbyists, the people who represent them --

Yeah, they do. But here again, I don't have any one of my clients tell me that, ever. I mean, not ever.

People are happy to pay the $35 on let's say, a cup of coffee, as an overdraft --

Yes.

They're happy?

Well, maybe not for a cup of coffee; that's a little extreme case. But most of it is for other things, like apartment rent. ... So it's meant to do that -- [avoid] the embarrassment of that and the late fees. Late fees just started in the '90s and 2000s. Water districts, electric companies, everyone climbed on the wagon of late fees.

And the truth of the matter is, without late fees and other stuff ... they don't make any money. There's no money in giving small loans out at 18 percent APR. So what will happen if they quit [covering overdrafts]? Then you're going to see more payday lenders out here. Why? Because there's a market demand for that; that's why.

You know, the payday lenders say that this policy by the banks is more usurious, more exploitative than what they do. The APR is higher, and they say the bank usually has direct deposit of somebody's salary checks --

That's correct.

-- so they can get the money right away, so they have even fewer losses and easier collection.

That's what happens. And this has been going back for 50 years. When a bank pays your overdraft, how they get their money back is ... the next time you make a deposit, they take that out of the check.

Well, what happens is some people that know that, they move their account, and the bank gets stuck with the losses. So to prevent that, I give them what I call a fresh-start repayment plan. And after you get past 30 days ... I told you you've got to bring your account balance back in 30 days or less -- if somebody hasn't done that, I go out to you and say: "Hey, Joe, I know you're probably having some problems. Why don't I give you a loan for this $500, clean your account up, and you don't have to move your account? You don't have to go anywhere, and I'm going to do it at zero interest rate." I've got hundreds of thousands of those all in the United States. Now, is any payday lender going to loan somebody $500 at zero interest rate? The answer is no.

Now, why would the bank do that? ... To save the customer and save them embarrassment, and help collect the money.

Why not give them a loan within the limits of the usury rates, like they do in Canada, or they do in other countries?

Some people have tried that. Why doesn't it work? Because they'll spend the whole $500, and then they're back to where they were before, living paycheck to paycheck. But the problem you're talking about, you can't legislate or regulate consumer behavior, and you can't change people's habits. Certain people live their life this way, no matter the consequences. ...

What do you say to the person who says: "Look, my wife and I have complicated finances. We move our money around between checking and savings accounts. I had no way of knowing that she had cashed a check. When I went out to use the debit card, I kept putting in the parking meters, and each time I put in the meter all day long, I didn't realize it, I got a $35 charge each time"?

What would I say to that person? You need to act fiscally more responsible than you are, and you need to keep your checkbook up-to-date as much as you can. But the problem is, something like 10 percent of the people in the United States balance their checkbook. Ninety percent never do -- never.

So how do they know what's in their account if they don't ever balance it? Electronic banking and debit cards made it more difficult for them. Why? Now you've got to keep track of that electronically. You've got to write it down somewhere to subtract it from your checkbook. That person obviously did not, so that's the reason he got overdrawn.

So is this business dependent on the financial illiteracy of the people?

Yes. And banks are obligated to educate them to a certain degree. That's why you have to have disclosures. That's what some of these regulations are about.

But you don't disclose your APR.

They can't. It's technologically impossible. How much is overdrawn, for how long? Banks don't know that. There is no way that they know that, so they can't disclose the APR. Even if they pass a law saying, "You must disclose the APR," they couldn't do it. It's impossible.

A credit union we talked to in North Carolina, they charged $12, not $35, $30. Why can't that be the standard here? Why do we have to charge $35 or $39 --?

Their cost is $12, and Bank of America is $35. Is that your question?

[Why charge] $39 dollars?

Why? Bank of America has more overhead. But I'm not supporting them either. Some people have gotten carried away on the fees; I admit that. The reason they have is, the only thing worse than making too much profit is making no profit.

You have to make a profit; otherwise you can't build branches, make things more convenient, invest in technology, have raises for all your employees. Now, I can find banks in this state that charge you $8 out in the country somewhere, $10. That's rare, but I still see those numbers.

They view this thing as a profit center. That's one of the things I tell all of my clients. I want to run this thing like a [line of] business ... so that you can run it correctly, properly, not with being greedy.

In your own literature, you say that if the bank adopts your policies, they'll make approximately $60 a year more a customer. In The New York Times, your executive vice president said $150 per account, and you said in Newsweek $150 per account.

That's approximately correct.

So if you come in and put this system in place, the bank is going to get $150 a year more out of its average customer?

Not more. Maybe they were making $30, $40, $50 or $100 before I walked in. It's going to go up to about $150.

And they're going to collect that in fees, on overdrafts, or over the limit on a debit card.

Correct. But we save the customers more than that in a merchant fee -- that's where this service comes into play -- and more than that in late fees on a mortgage loan, other loans that they have, let alone the embarrassment of it and the things that go along with it. You know, when you write a hot check, ... it hurts the consumers so bad. It gets on their credit report; they've got to pay late fees. It's embarrassing. They've got to tell their wife about it, or whatever the case may be. That's why it is a good service. That's why people don't complain about it.

A payday lending company CEO [Rick Lake] who I interviewed said exactly the same thing to me about payday lending: It doesn't go on your credit report; no one knows about it; and it's a way to -- as one of the customers said -- pay their credit card bill so they wouldn't get a late fee on their credit card.

Or get their credit card canceled. I've seen profiles of payday lenders. It is not who you think it is. They are educated. They make X amount of money per year. They're married and got a car. I mean, there's a need for that service.

Now, what drives that need? ... People live beyond their means. The younger people, they don't care that much about that, not really. That's why it's more of a younger-person thing than it is income level.

What is free checking?

... The free checking that I did was no minimum balance. It used to be that to open an account at a bank you had to have $100 or $50 or $75 years ago. I didn't care if you opened an account for $5.

So it made it available to everybody. There's no service charge, no maintenance charge. It isn't like if you wrote 50 checks I'm going to charge you more. Now, free checking started before me, but they had hidden hookers -- free checking if you have direct deposit payroll -- underneath it.

So why did I do that? Here again, to combat the payday lenders which were proliferating all over the United States in the mid-90s and early '90s, and to get the bank more volume.

So you were trying to attract the clientele of the payday lenders --

To a certain degree, that's correct.

By offering something called "free checking." But was it really free?

Sure, no service charge, no nothing -- no maintenance fees, nothing. There was no charge whatsoever on the account.

Except overdraft fees.

That's not in the fee schedule. That's a separate fee. That has been that way for 100 years.

It's not subject to Truth in Lending Act. ...

And so it's basically unregulated? And you can charge any fee you want, theoretically.

Theoretically that's correct -- just whatever the market bears.

But is that what, in the end, would pay for the free checking, the fees from that?

Yes, it would. The two best marketing words in the United States are "free" and "all you can eat." So people love free checking. It brought in a lot of customers ... who didn't have a checking account before. ...

But doesn't that attract a certain kind of clientele, people who would care about paying $5 a month to maintain their checking account and for whom [overdraft fees] might be a significant amount of money?

Well, it's ironical that you say that. Here again, that's why it's on fee schedules at banks. It's a separate fee. It's not part of the maintenance fee. It's self-inflicted. You do this yourself.

You mean bouncing checks?

Sure. They're the ones that wrote it. I didn't ask them to do it. I didn't tell them they should do it. Neither did the bank or anybody else.

But at a certain point, if a behavior pattern is self-destructive of a customer, isn't it in the bank's interest to stop charging them at a certain point?

Yes, yes.

Don't they charge these fees over and over and over again, sometimes six, seven, eight, nine, 10 times a month or more?

Some banks do. I never have done it. I have a cutoff as to what I'll charge you.

And what's fair in your mind?

Three or four.

In a month?

Yeah. After that I'm not going to do it, because you're right about the debit fees. It kind of rolls on you, and you don't realize you're overdrawn. You haven't balanced your checkbook, and all of a sudden every check that comes in bounces, because you've got a negative $10 balance and you just don't know it. But that goes back to people -- ... only 80 percent of the people open up the envelope from the bank, so how would they know what their balance is? And of those that open it up, how many can balance their checkbook?

Do you agree, then, with the critics who say that 10 percent of the people who are involved in getting overdraft fees, particularly from ATMs, are paying for everyone else, and that this has become, in a sense, an imbalance? It's a system that's gotten out of control?

Well, I don't think it's out of control, but it is true that it's just a certain percentage of the customers are paying for that, like a lot of other businesses. Banks make a lot of money off this. It's a nice income source for them. It's a nice service. See, people don't complain about it. They really don't. I know you don't believe that.

I know, but you're saying people don't complain about it --

Well, why don't they move their account? That's your option. You can either complain to the bank, or you say, "Well, I'll just move my account from here to here." Why don't they do that? And they don't do that. ...

Why can't the bank deny the purchase at the point of sale if there's insufficient funds?

They could if they wanted to.

But they don't. They used to. Eighty percent of banks did five years ago. Now 80 percent don't. Why do they allow it to go through, to collect the $35 penalty fee?

To collect the $30 fee and to make it more convenient for the customer and provide some value-added service. Like I say, you use your debit card to pay for a restaurant bill. Well, if they swipe [the debit] in there, and they deny the transaction, what are you going to do?

More debit cards are used for lots of things. They're replacing checks. It hasn't surpassed check volume yet, but it's getting close. It's just an electronic check.

Do you see the argument about fair vs. free market? I mean, in one sense we could say caveat emptor, whatever the market will bear, to the consumer. But the consumer, in turn, is saying, at least especially in these more difficult times: "Hey, wait a second. You don't have to take every fee, every transaction." You yourself said they should limit how many --

They should.

But they don't.

They should have a limit on it on a daily basis, because things have a chain effect that create six or seven or eight fees. They should have a limit on them. All my clients [put] a limit on it.

All your clients?

Yes. I recommend that to them.

And they all do that?

Yes. But I deal with community banks -- the medium-size banks all over the United States. I don't deal with Bancorp, Citibank, Bank of America or Wells Fargo or any -- I don't deal with people like that. They think they know everything, and that's fine with me.

They think they know everything?

Sure. I know some bankers, you talk to them, and they think they invented banking, I mean, they're so smart. They're not, but that's what they think. I don't have time to do business with them.

Am I correct that you think the major banks really are abusing this more than -- ?

Sure. The community banks don't abuse it like that. There was one story about a cancer patient here a few years ago in Ohio, and he didn't make a deposit, so he's writing some [checks]. And I've been in the hospital for a month, and you know, you don't keep up with your checkbook like that.

And the bank charged [him] X number of fees. I don't know of a single community banker I've ever met that wouldn't refund those fees.

But good luck with one of the major banks?

Right. They don't do that, no. My sister worked for a major bank, and they had it coded in their system that they couldn't waive any fees on certain things, like a free checking account.

All community banks waive fees on people that have desperate situations or whatever the case may be. Why? Because the heart and soul of community bankers is ... the community banker wants the community to survive and thrive. ...

Let me read to you something from Martin Eakes from North Carolina. He has a little credit union, and he said to us: "I want to get poor people to become part of the banking system, but I can't, in good faith, now ask a family to join the banking system or the credit union system if they're going to be fee'd to death on overdraft fees. It will kill them."

He's wrong. You need to offer them a free checking account, no service charges, and just educate them not to write hot checks. It's that simple.

It's self-inflicted. Banks don't assess that fee. They do, technically. The customer gets it assessed to him by behaving that way -- absolutely positively.

And the point is ... a hot check, to a consumer, is nothing but bad news.

But you do agree that if you apply this fee structure in a way that takes advantage of the individual, seven, eight, nine charges in a day, on a debit --

That that's abusive. I agree with that. I agree with that.

And that is going on with the major banks.

It is. It is.

The proposal in Congress, basically, as I understand it and as it relates to these overdraft fees is to opt in or opt out, and to give people a chance to opt out.

Yes, that's correct.

Or to opt in at the beginning.

I agree with that 100 percent. I've done that from day one. If you don't want this, we'll take it off your account. ...

You give them a choice to opt in --

To opt out -- it comes with the checking account. You've disclosed that when you open up the account. You sign a thing, and it says you understand this. And then if you don't like it, just call the bank and we don't do it anymore.

What's the alternative? OK, when you say you want to opt out of it -- every time you write an insufficient-fund check, I charge you $35 -- every time -- and then you're going to get the merchant fee, the late fee and all the other fees. Who would opt out? Nobody. That's why it's [not any good]. Nobody's going to do that.

What you're saying is because you charge a flat $35 fee ... you're saving people money, embarrassment, and you're giving them a chance to make good on it.

Right.

And no one would opt out of that.

I won't say no one. There are some exceptions to the rules. I've done it that same way since 1994, and this is 2009. Fifteen years. ...

So why not just say, "We're not going to give you overdraft protection anymore"?

In some cases they do that if they abuse it. I've seen that happen thousands of times.

What about disclosure regulations for other lenders, including those payday lenders have to adhere to, where they post an APR, and they tell you what the variations are if you pay it off in two weeks or if you pay it off in a month?

Because they don't know how long you're going to be overdrawn, whether it's three days or three months.

The payday lender doesn't know for sure when you're going to pay it back.

I think he posts it based upon the payment that they have. Banks don't have a payment plan. You pay it back out of your next paycheck. ...

Don't you think if someone saw a note next to an ATM that said, "If you go over your limit and we charge you a $35 fee, the interest rate we are charging you could be as high as 3,000 percent," that it might cause them to think?

I don't know the latter part of your question. I know the former part, because I've done that for years. I do have a sign posted at the ATM that this is going to incur a $35 fee or a $30 fee. I don't have anybody that does charge a $35 -- most of my clients charge $25.

If people knew that they were going to pay $35 for a cup of coffee, do you think they would do it?

Yeah, I believe they would if they knew it at the time. I've seen it happen thousands of times, because they do it at the ATM now. I don't think they'd pay $40 for a cup of coffee, but he doesn't know he's overdrawn at that point. ...

But when they go and use a card -- if you go ahead and use this card you're going to incur a fee of as much as $35 or $39 in some cases.

They could do that. That could happen. ...

We found a number of surveys that have found that over two-thirds of consumers would rather have their transactions declined than being given an overdraft without their express consent on a debit card transaction -- three different surveys.

I haven't read those surveys. That surprises me. I never read that.

The FDIC says that they get 12 times as many complaints about overdraft fees as they do about overdrafts related to linked programs, you know, where you have a line of credit or a credit card. And so it appears the consumers don't like this. ... And again, they don't like the way debit cards operate where they're not given that choice.

Is your question do I believe it?

Yeah.

No, not for one single second. Most people know that they're overdrawn. They'll just do it anyway. They know when their checks are overdrawn. All they have to do is balance their checkbooks.

You say that your clients are primarily community banks, and that it's the big banks' overdraft programs that differ from yours and are in many cases abusive?

Yes.

What do they do that you don't do?

Well, they don't disclose the dollar amount to the customer. They don't disclose how it works or how they can avoid it, how if they don't like the way it works how they can opt out of the thing. I welcome that with open arms.

We're not trying to take advantage of anybody. Here again, we're just trying to provide a service for the people that need it, when they need it. ...

With debit cards -- they could deny a transaction when you didn't have funds, when it would make you overdrawn. Up until six or seven years ago, most banks did that.

Yeah, they did that.

Right. About four or five years ago, they really all started to take on the overdraft debt and so on.

And I have clients that do that.

Why did they change?

Two reasons: Make it convenient for the consumer, and for the money.

The money? Because the profits increased. The more fees you charged, the more money you make.

Yes, but also for the convenience of it. ... However, there's no merchant fee involved with the debit card fee. There could easily be a late card fee and stuff like that, because they use their debit card to pay off lots of things, pay their rent.

The FDIC, in their report, say that 58.6 percent of the banks order their transactions from smallest to largest.

I don't know if that's true or not. I have no way of knowing that.

And the implication of their report is that ordering them from largest to smallest is to generate fees. You get more fees for each transaction that goes over every dollar, every $10.

OK, there's two ways of doing it. You described this way that the big banks are doing it, and the highest dollar amount is there. ... I would say you would be hard-pressed to find a bank that's under $10 billion -- a community bank -- that does it the way you're saying -- manipulate the transaction fees, debit card fees first, in high-dollar to low-dollar [order]. Hardly any community bank does that.

And I've advocated for years: Post it in check sequence order. In other words, I've got to assume that you wanted me to pay check 101 before 102, because that's how you wrote it in your checkbook. So that is the proper way of doing it. That is the correct way.

Fair enough, but it's not done that way.

All my clients do it that way. Every single one of them.

And if we wanted to look for the people who are doing it that way, we would look at possibly the largest banks.

Yes, yes, yes. ...

But there's no restriction on a bank, ordering that high-to-low way?

No, that's correct.

If they're going to make more money doing it that way --

That's correct.

That's a big temptation to do it.

That's correct. The Comptroller of the Currency ruled on that about four or five years ago -- and it's in their deposit agreement that they have the rights to post checks in any way that they see fit. ... They looked into this case many years ago.

That was the era of deregulation.

Yeah.

But the fees on the tiny transactions or the small transactions, that's really a punitive action, right, because in a sense, what you're doing, you're making somebody pay more in a penalty than the actual value of the thing that's bought. ... That's why people are irritated.

They are irritated by that. It would irritate me for the $5 cup of coffee to cost $35 or whatever the case may be, yes.

But you are involved in talking with the banks about how they process these payments, right?

Yes, and it depends. Here again, at the community bank level, it depends on their data processors. Some can't do that. As a matter of fact, hardly any of them do that -- just the big banks.

So this is something that most of the larger banks do to churn more fees, right?

Yes, it is. And to ensure that this doesn't get on their credit or stuff like that, yes. And they're assuming that you want me to pay your large-dollar fees first, because those are the most important to you.

But it's similar in some ways to credit cards, because they're in a sense able to change the price of the product after the sale.

Well, they used to be able to. I know, for instance -- this happened to me personally years ago -- if you got a cash advance on your credit card, ... all transactions were subject to interest from the date of purchase rather than give me a 30-day grace period of time.

I didn't know that. Did it make me mad? Yeah, it made me mad. And there's no question that the credit card companies are going to have to change the way they disclose stuff.

And the ATM debit card business? You don't think they're going to have to disclose more?

Well, it has happened at the ATM. As technology has come along, it has happened in that area. Most ATMs do that. They couldn't do that in the beginning. Now they do that. You know, "Are you aware that this is going to charge you $1.50 a transaction? If so, press 'yes.'"

Is it fair to charge $39 for every transaction?

I really don't. That's sounds like a silly answer for somebody who's been in this business all of his life. I don't know. I mean, it's getting expensive. It is getting expensive.

But some of your clients, they charge $8, $10, $12.

I would say my average client charges $20 for an NSF or overdraft.

Who comes up with these numbers, whether it should be $20 or $39? Is it some relationship to the amount of work that goes on?

The marketplace demands some of that. It's always been kind of a crapshoot how they come up with these fees anyway. It has nothing to do with costs. It's market conditions, same like anything else.

It's what the market will bear.

Yeah, sure. I repeat, it all started ... with what's called punitive pricing. I'm going to make this expensive. And I'm talking back when they charged -- it wasn't too long ago the banks were charging $5 for this, $6, $10 --

Or nothing.

No, they never charged nothing that I'm aware of. Now, maybe they did, but I'm not aware of anybody that ever charged nothing for an NSF.

Some people we've interviewed have said that the era of people living beyond their means -- part of which is subsidized by this overdraft policy -- should now be followed by an era of making people live within their means.

I agree wholeheartedly.

We should deny people credit.

That's what I have always felt.

You feel we should go back to the time where you went to your ATM machine, [and] if you didn't have the money in there, then you don't get it?

Yeah. However, the other side of that story is -- and that's why I would have to debate it and even philosophize it -- it's that you're cutting out a lot of people, because I believe that if you return checks insufficient, that's very onerous on people. I mean, they've got all these other fees, which we discussed earlier, so I don't know that I would advocate that, because I'd have to cut that out, too.

A debit card is just an electronic transaction. It's the same as a check.

But it's so much easier, so much more convenient. And you don't have to think about it. It's, as they said about credit cards, "priceless."

Yeah, I used to use that word. Yes, it is.

So it's not an education situation; it's a situation where you want people to use this device, this instrument, and it generates profit.

No. It is people's responsibility for them to balance their checkbook. Banks can't balance it for them. It's up to you to know how much money you have in your account. ...

Is all this going to have to change? It's become a really big success as consumer spending increased -- 70 percent of the GDP [gross domestic product]. Is all this plastic money, these cards and the way they're handled going to have to change?

Probably. I think it's going to have to change, because you're talking about people's spending habits, and, just like credit cards, people just got carried away. I read stories where the average college graduate, I forget my numbers, ... $13,000 in college debt loans and $7,000 in credit cards debt that he's piled up over the years.

They're going to have debt forever. So is something going to have to happen in the plastic-card world, as you called it? I wouldn't even guess what is going to happen, but something is going to happen. Some things have gone out of kilter, but not necessarily just overdraft; it's all the spending side. The good news in the last year or two is that consumer savings is starting to grow for the first time in years and years.

We have children, right?

Sure.

What kind of changes do you think they're going to have to face in the way they live?

Well, fortunately for me, I have two wonderful girls. I really mean that. I have taught them through years of my struggling -- and I did struggle for a long time -- that you can't live with debt; that you can't live off credit cards.

They buy everything off the Internet. They don't want to go to the bank. They think I'm a fool. Why? Because I still go to the drive-in window or walk in the bank and get checks cashed, and stuff like I do. They have no intentions to ever sit in a bank lobby in their lifetime, and anybody that does it is stupid.

That's the change. And by the way, both of them don't use the debit card. And I asked them why. They said, because they couldn't keep track of it, so they quit using it, and they use a credit card for everything, and then they get frequent-flyer miles on the credit card.

So they think it's more dangerous than a credit card?

With debit cards, [people] get carried away. People don't even know what they're spending, and they don't write it down in the check register and so forth. That's what happens for the most part. The $35 cup of coffee -- it's just an oversight on the consumer's part. The bank didn't know it was for a cup of coffee. The bank doesn't have it [down there as] Starbucks. It just comes in as a transaction.

And banks have automated so much out of necessity -- because we need to be more productive, so they're trying to cut expenses -- so they don't look at every transaction. And they took the risk that the expense they saved would be more than the fraud that they would be subject to, and it's true. That happened.

Well, the same thing is in plastic. Something is going to happen. Maybe it's this law; I don't think so. Or somebody is going to figure out how to put a handle on this, because it has gotten carried away. It really has.

And it looks like the government may finally do something about all of this.

I agree with you. That's why Obama wants a consumer protection agency, which, by the way, I think is a very bad idea. But they want that.

You're against that?

Yes, I am, absolutely, positively. First of all, we already have an agency like that, so we're duplicating things. The Federal Reserve is in charge of this.

But the objection to the Federal Reserve is that it did nothing, really, until [recently].

No, they came up with all these rules in all these years --

Recently. And the Federal Reserve is owned by the banks and paid for by the banks. What they're saying is that we need an agency that represents the customers.

Well, I don't like it because I'm not a liberal. I don't like it because what starts out as a little deal in the government all of a sudden becomes a monster, like Environmental Protection Agency. It just started as a little innocuous something. Now they're trying to regulate, you know, your creek in your backyard and all that stuff.

I don't like the government dictating to bankers -- which is a free-enterprise system -- what they can charge for something. It's none of their business. It's a free-enterprise system. Let the market work, and it will take care of itself. ...

If you're charging too much, people will leave you. People vote with their feet. So I think that's a terrible, terrible idea. Does there need to be more emphasis on that? Absolutely. Light the fire under somebody's butt to say, "Hey, you going to get with it?" in the Federal Reserve. Absolutely, yes, you do. But to create another agency, that is terrible.

posted november 24, 2009

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