Economics 101

The Bank Taketh and Then Some More

Overheard at the Northampton Coop Bank branch in Florence, a customer laboring with the aid of a teller in trying to fathom what was going on with her checking account.

Among other items on her statement was a debit card charge at the Stop and Shop in Hadley, and then an additional $7.50 charge for having her car washed, also in Hadley. Wait. What about that additional $27 deduction?

That’s the pesky little fee the bank imposes on the customer for overdrawing her account when she swiped her debit card for the car wash, and, unhappily, there wasn’t enough money in the account to pay for that transaction.

Ouch. Expensive car wash.

Months ago we wrote about this growing bank fee ploy when the Florence Savings Bank offered me a “discretionary OOPS limit of $800,” to cover overdrafts in my checking account.

As a bank customer service employee old me at the time, the new feature was a “mini loan for overdrafts.” This means you don’t have to worry about bouncing a check, because the friendly neighborhood community bank will extend you an extra $800 of overdraft protection. Good for them. But might the bank really want to encourage you to bounce checks or swipe your debit card even though you don’t have sufficient funds in your account? I elected but not to get the so-called “protection.”

After all, the bank will charge you a $28 fee for each overdraft, even if it is only $1, and we have read about countless people who routinely and, without thinking about the consequences and costs, use their debit cards to grab that quick cup of coffee or pack of gum, only to overdraw their account. They react first with anger and then, later, embarrassment when they see the $28 fee that goes along with the minor purchase.

At FSB you’re required to use your debit card at least 12 times a month in order to get the slightly higher ( 2.1 percent ) interest paid on deposits on its so-call “rewards account.” Ever cynical, I suspect the bank recovers more money from debit card overdraft fees than it does on the piddling interest it pays out on those “rewards” checking accounts.

The Bank Giveth, but Only a Tiny Bit

As for interest paid to depositors, let’s take a look at what that means these days for people who trying to save a little money for the rainy day or even some future big ticket item, rather then going deeper into debt now and worrying about the future later on.

One of the sharpest reporters and columnists writing on the business pages of the New York Times, Floyd Norris, recently looked at the enormous spread between what banks charge for services, including loans, and what they pay us depositors for the use of our money.

He found that most of the big banks—JP Morgan Chase, Citigroup, Bank of America and Wells Fargo—the ones we are told we should shun and as the enemy (Don’t Blame Me I Bank Locally), pay .05 percent on ordinary savings, or what used to be called passbook savings accounts.

Norris calculated that if you put $5,000 in such an account you would earn 21 cents a month. If you left in there untouched for 20 years, it would grow to $50, assuming the interest rate stayed fixed.

“At that rate,” h e wrote, “if you wanted to put away enough to produce a retirement income of $50,000 a year, without touching the principal, you would need $100 million.”

For the record, at the local banks where I have checking accounts, the interest paid on those accounts is also 0.05 percent. A passbook savings account gets a slightly higher 0.25 percent, and a 12-month certificate of deposit earns a whopping 0.75 percent. In each instance, the yield on these accounts is below the current rate of inflation. Imagine how deep in the hole you would be if you were socked with a couple of $28 overdraft charges each month. In other words, banks find that they can get deposits for next to nothing, something almost unheard of. Good for them.

Those of us who deposit money in a bank—global, national or local—are on a fool’s errand because we are giving money away and getting stiffed by the banks in return.

On the other side of the ledger, the cost of borrowing money from banks ranges from 4.5 percent to 5.2 percent, auto loans can range from 6.25 percent to 6.75 percent, home equity loans are at 3.25 percent and secured loans are available at interest rates ranging from 10.5 percent to 12.5 percent.

So the spread, as they call it, is pretty steep between what banks pay for deposits and what they charge us to borrow our own money. And the biggest losers, or suckers, are those who try to save money rather than borrow and spend, borrow and spend, which has long been the erratic and dangerous engine we rely on to drive our nation’s economy.

Not surprisingly, the big winners are the banks, unless they get into trouble, as so often happens, often on a grand scale, as the result of greed, incompetence, or exploiting the economic ignorance of their customers. When banks are faced with failure, the government lifeline is suddenly cast out, and they grab it and continue on their merry way.

--Edward Shanahan