Wikinvest Wire

The Fed gets religion (well, a little)

Friday, November 13, 2009

It's amazing the things that people and organizations will do when they perceive that their way of life or their very existence is being threatened. Such is the case with the recent announcement that the Federal Reserve will soon require banks to offer overdraft "protection" as an "opt-in" service rather than as a default choice for customers who have complained loudly about $35 cappuccinos in recent years.

The details are in this report from the Washington Post:

The new regulations, announced Thursday, cover overdrafts from ATM withdrawals and debit card purchases, which account for roughly half of overdrawn transactions, and help to address widespread complaints that consumers who were unaware they had insufficient funds were being charged exorbitant fees for purchasing a cup of coffee, for example. The rules, which take effect July 1, 2010, come as banks have drawn increasing scrutiny in the wake of the financial crisis for charging high fees and interest rates at a time when consumers are financially strapped.

Banks will be required to send customers a notice explaining their overdraft protection services and fees before they are asked if they want to sign up. But the regulations do not cover payments made by check or recurring debit card charges, such as automatic bill payments. They also give banks wide latitude over the structure of overdraft fees once customers opt in, though Fed officials said the regulations allow consumers to drop the service at any time. Two bills targeting the fees are under consideration by Congress and would place tougher restrictions on the industry.
No wonder more and more people are shunning plastic money and opting instead to use good 'ol fashioned cash for their day to day expenses.

From personal experience I can tell you that, once you get used to setting aside some cash every month for your routine out-of-pocket expenses, you'll never go back.

And you'll sure never need overdraft protection.

The odd collection of receipts that may or may not get matched up against your bank statement at the end of the month is another plus.

Anyway, there's at least some progress being made to rein in bank fees and curb excesses now that Ron Paul and others in Congress have put a little fear in Ben Bernanke's belly.
Since the financial crisis began, the Fed has been under pressure to demonstrate its concern for protecting consumers and has imposed new limits on mortgage and credit card lenders. The recent spurt of rulemaking follows a decade of inaction during which the Fed ignored mounting evidence of abuses and repeated pleas from consumer advocates. As a result, the Obama administration wants to strip the Fed of some of its responsibilities and create a new agency devoted to protecting consumers. Fed Chairman Ben S. Bernanke has declined to take a public position on the proposal, but he has highlighted the Fed's recent actions as evidence that the institution is aware of its past shortcomings and working to improve.

Fed officials said Thursday that they had been working for several years to refine their regulations on overdraft charges, which infuriate consumers but are a significant revenue stream for banks. Fees from overdrawn U.S. accounts will reach $38.5 billion this year, up from $36.7 billion in 2008, according to research firm Moebs Services in Lake Bluff, Ill. A survey of smaller banks released by the Federal Deposit Insurance Corp. last year showed that about a quarter of accounts had been overdrawn at least once in 2006, the year the study was performed.

Edward L. Yingling, chief executive of the American Bankers Association, a trade group, said the regulations strike a balance between consumer concerns and industry needs. But the group also said its members will be hard-pressed to find replacements for that revenue, especially as the recent wave of financial reforms has limited their ability to charge riskier customers higher fees and higher interest rates for loans. That could mean banks will begin considering charging for popular services that they had provided for free, such as checking and no-minimum-balance accounts.
Conventional wisdom has it that the U.S. economy will not make a complete recovery until the U.S. banking system does.

Sometimes you have to wonder if, maybe, the U.S. economy will not make a complete recovery until the banking system as we know it ceases to exist.

This is a good, albeit tiny, step in that direction.

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AJ said...

I've never had any problem with my debit card or overdraft fees, but then again I don't let my checking account get so low that a cup of coffee or a tank of gas could put me in the red. Could it just be that I spend my money responsibly and live within my means? Is that such a unique idea?

Anonymous said...

What am I missing here? There appears to be an easy way to avoid these fees: Don't overdraw your account. I use credit for almost everything and I haven't paid a dime in interest or fees.

I agree with the previous poster - Spend responsibly, live within your means and keep track of your balances. Is it really much harder than that?

Anonymous said...

For most people, yes, it's harder than that because they're dimwits when it comes to personal finance.

If you broke down who pays how much in fees you will surely find a very high inverse correlation between income (or net worth) and bank fees paid, so, for these people, cash would be preferable.

Tim said...

Thanks anon 10:50, I was just about to comment along those same lines. The rationale in the first two comments above is entirely reasonable - I used to do the same, but, to be honest, I like not having so many damn receipts to keep track of. Another added benefit is when you eat out, as long as you have the proper mix of bills in your wallet, you can just leave the money on the table and walk away rather than waiting for them to swipe your card and bring it back.

Anonymous said...

Cash is great. All you have to do is look in your wallet to know if you can afford something. The electronic stuff just confuses the non math majors.

The banking system has an effective propaganda machine. It has convinced the nation that it is absolutely crucial for every transaction. In reality, the nation got by just fine with cash transactions, and a gold backed currency.

The "innovations" have enriched bank executives, but turned out to be a giant Ponzi scheme. Plain vanilla banking should be restored, as in days of yore. Take in deposits, and loan them out to fund nascent small businesses. Pay reasonable interest to depositors with their share of the income generated by the businesses.

AJ said...

No offense, Tim, but what's the point of keeping receipts? You can look at your online banking account any time and see a history of all your transactions.

Tim said...

I don't mean keeping receipts forever. I mean keeping receipts and comparing against online records on a regular basis to ensure that, when you pay the bill at the end of the month, you're not paying for something that you didn't buy.

I'd be interested to know what percentage of the population just pays either the full amount on their credit cards (or, probably in more case, just the minimum payment) without really knowing what it was they bought last month (or last year).

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