MONEY overdraft fees

Fewer People Are Paying Overdraft Fees and Banks are Hurting

overdraft-fee
Johner Images&mdash/Getty Images/Johner RF

Overdraft fees are on the decline, and it's hitting banks where they live.

Overdraft fees, one of the most hated charges in existence, are getting smaller. And the loss of revenue is costing banks dearly.

The Wall Street Journal, citing data from economic research firm Moebs Services Inc, reports revenue from overdraft fees is down 4% from last year, the largest drop since 2011. Overdraft fees tend to dwarf other consumer-related revenue streams like ATM and maintenance fees and the WSJ notes overdraft fees make up 6% of earnings at banks with at least $10 billion in assets. Total overdraft revenue has fallen from $37 billion dollars in 2009 to about $31 billion today.

Why are overdraft fees becoming less lucrative? Increased regulation has played a big role. A 2010 Federal Reserve rule has prevented banks from charging fees on purchases or ATM withdrawals that would overdraw the consumer’s account unless that customer specifically opts in to “overdraft protection.” (If a customer does not opt in, a transaction that would overdraw their account is simply declined.)

Since then, overdraft revenue has dropped, and fear of further federal restrictions is encouraging some banks to take a gentler approach with those who do incur the fees. The Consumer Financial Protection Bureau is expected to release new overdraft regulations in the next year, according to the WSJ.

The slow death of the overdraft fee is a feel-good story for most people, but the banking industry argues that consumers will pay a cost. Richard Hunt, chief executive of the Consumer Bankers Association, told the WSJ that banks may start charging higher monthly maintenance fees (and raising the minimum balance required to be exempt from those fees).

There’s something to this argument: Overdraft fees, though a big source of revenue for banks, are paid by a small fraction of their customers. A 2014 study by the CFPB found 8.3% of customers overdraft more than 10 times annually, and they’re collectively responsible for a 73.7% of all overdraft fees. Meanwhile, nearly 70% of account holders pay no overdraft fees at all.

So many bank customers will hardly notice the absence of overdraft fees. But can banks really make up for the lost revenue by charging non-overdrafting customers more? That’s not so clear. After all, if checking account holders as a group are so willing to pay higher maintenance fees, why aren’t banks charging them already? Maybe overdraft fees were just a low hanging fruit for banks—an easy fee they could charge to a small group of customers with fewer options.

As overdraft fees fade away, we’ll find out.

TIME Retirement

The Retirement Risk We All Share

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Getty Images

Our retirement system is as hard to understand, opaque, and predatory as ever

As wealth begins to get transferred from baby boomers to the millennial generation—the largest single generation in history and within five years fully half of our nation’s workforce—many social contracts that were enjoyed by the parents and grandparents will not be relied upon, or available, for their children. Two financial bubbles have burst: American cities have gone bankrupt, and the notion of guaranteed pensions has come to seem like a relic from a more innocent time in the world where society paid back its firefighters, teachers, and hard-working middle class for keeping us safe, educating our children, and ensuring the engine of our economy keeps running. So pronounced is this breakdown between our country, our corporations, and our workers that entire political campaigns are won and lost over middle class workers and the pensions they receive in retirement.

Corporations don’t want any part of guaranteed pensions. It’s too expensive, their shareholders don’t like it, and it crimps profits. Neither do governments—politicians are laser focused on the next election cycle and would rather divert taxpayer dollars toward shiny new concepts that will get them re-elected over boring old public pension funds. Today, only 1 in 5 workers in corporate America still has access to a guaranteed pension. Half of American workers have no access to any workplace retirement plan whatsoever. That’s right: in the future, we are going to own all of this risk. We’d better learn to make good decisions for ourselves.

Unfortunately, the 401(k) system is as hard to understand, opaque, and predatory as ever. Two thirds of Americans do not know that they pay fees on their 401K plans, and 90% of people could not accurately tell you what these fees are. Why? Because they never actually write a check to anyone—the fees are automatically deducted from their accounts. I challenge you to go log in to your employer’s 401(k) plan now, and figure out within 5 minutes, or 5 hours, or 5 days the total amount of fees you pay per year. You won’t find it. And it is a huge amount of money. Lifetime fees for the average American household are greater than $150,000 and can erode a third of total savings. Broadly speaking, total mutual fund fees could be the least-known and least-understood $600 billion that come out of Americans pockets every year.

We need to make this far simpler for people. It should be law that you can only give people advice on their 401(k) or IRA, or futures for that matter, if you owe them a legal fiduciary duty to only act in their best interest. Fees should be disclosed in terms that people can understand. Nobody understands what “basis points” or “expense ratios” are. This is purposeful. How about: “this will cost you $5 per year?” That shouldn’t be too hard, right?

Finally, hundreds of investment choices are often used as an illusion to give unsuspecting people the sense that they, too, can beat the market if they just choose right. By now, we know that beating the market is impossible and we should steer people toward the things we can control—diversification, low costs, and good savings behavior over long periods of time, and through many market cycles. Watching CNBC is a waste of time. Index funds are the way to go (although some 401(k) plans still don’t offer them).

The Obama administration and Department of Labor have been trying for years to institute protections for investors against high fees and high-risk products. But the lobbying against these protections has been vicious—billions of dollars of profits do not just go quietly into the night.

So how about a simple and effective do-it-yourself solution in the meantime? The next time someone is offering you serious advice about your retirement or the stock market, print this out and ask them to sign this statement:

“I ________, as your advisor, will act as a fiduciary and only give you advice that is in your best interest.”

If your advisor will not sign this statement—for your own good—run as fast as you can in the other direction and find one of the many advisors that will. It could save you tens of thousands of dollars and years in retirement.

In a world where we are left to fend for ourselves in retirement, the stakes are too high not to at least make sure that someone is legally obligated to tell you the right thing to do. Your 65-year-old self will thank you for it some day.

Greg Smith is president of blooom, an online service that evaluates, simplifies, and manages 401(k) accounts for individuals, and the best-selling author of Why I Left Goldman Sachs: A Wall Street Story.

TIME Companies

Goldman Sachs Is Making New Dads’ Lives Way Easier

Goldman Sachs
Hero Images—Getty Images/Hero Images Father and children using digital tablet in bed

The bank is doubling its paid parenting leave for non-primary caregivers — from two weeks to four.

New fathers working at Goldman Sachs just got some good news.

The giant investment bank is doubling its paid parenting leave for non-primary caregivers, Business Insider reports, citing an internal memo the bank sent out to employees.

Starting this week, new non-primary parents at Goldman will now get four weeks of paid leave in the first year after their child’s birth instead of two weeks. Goldman offers 16 weeks of paid maternity leave; same-sex partners are eligible for the bank’s parenting leave policies.

Laura Young, the head of Goldman’s wellness programs, told Business Insider that several factors went into the bank’s decision to offer more parenting leave to new dads:

‘Mainly, we realized that we have a number of employees where both spouses or partners are working and in order to provide opportunities for them to balance both their work and personal lives, it was important to provide individuals the opportunities to spend more time with their families,’ Young said.

Goldman is not the only Wall Street fixture to offer paid leave for new dads, as Citigroup offers two weeks of paid leave and Bank of America offers 12 weeks. Last year, Change.org made headlines by offering 18 weeks of fully-paid leave to all parents, while both California and New Jersey have installed state-wide, mandatory paid leave programs.

TIME Security

Why Using an ATM Is More Dangerous Than Ever

Breaches have risen dramatically very recently

In a time when major data hacks are on the rise—think Target, Home Depot, Sony—it’s no surprise breaches on individuals are also up. According to FICO, debit-card compromises at ATMs rose 174% from January to April of this year, compared to the same period last year.

And that’s just breaches of ATMs located on official bank property. Successful breaches at non-bank ATMs rose 317% in that period.

In other words, withdrawing money from an ATM is more dangerous than it’s been in a long time—specifically, the worst it has been in two decades, according to the Wall Street Journal, which cites a prediction from consulting firm Tremont Capital Group that criminals will make more than 1.5 million successful ATM cash withdrawals this year.

As Fortune reported earlier this year, a majority of American corporations believe they will be hacked in 2015. The questions they are all dealing with is how to prepare for them and how to deal with them when they happen, because preventing these compromises has become increasingly difficult.

Banking institutions, as well as the payment companies that connect banks to consumers, like Visa and MasterCard, have beefed up their technology more aggressively than ever in order to both innovate and securitize. But for a private consumer who simply wants to take money from an ATM, stats like these are nonetheless sobering.

Read next: 5 Easy Ways to Avoid Getting Hacked at ATMs

Listen to the most important stories of the day.

TIME Banking

New Survey Confirms Exactly What Everybody Hates About Wall Street

Five Years After Start Of Financial Crisis, Wall Street Continues To Hum
John Moore—Getty Images A street sign for Wall Street hangs outside the New York Stock Exchange on September 16, 2013 in New York City.=

Almost a quarter of bankers said they'd break the rules

Wall Street bankers are feeling a greater willingness to violate laws and ethics to get ahead, according to a new survey that finds no discernible impact from years of record fines and tightened regulations.

One-quarter of respondents said they would violate insider trading laws to make a $10 million return as long as they knew they wouldn’t get caught, according to a survey of 1,200 financial professionals conducted by University of Notre Dame at the behest of the law firm Labaton Sucharow. That was actually a slight uptick from the previous survey, when the percentage stood at 24%.

Respondents weren’t exactly impressed with regulatory oversight either. Nearly half deemed the regulatory agencies ineffective at detecting and prosecuting illicit behavior.

 

MONEY Banks

Bank Charged $50M in Illegal Overdraft Fees Says CFPB

Regions bank
Rosa Betancourt—Alamy

Consumers paid millions in illegal penalties to a bank that operates in 16 states, according to the Consumer Financial Protection Bureau.

Consumers were charged nearly $50 million in illegal overdraft fees by Alabama-based Regions bank, federal regulators said Tuesday. The bank, which operates in 16 states, failed to get consumers to opt-in to overdraft coverage, failed to stop charging illegal fees for nearly a year after it discovered the activity and also charged illegal fees in connection with its payday-loan-like “deposit advance” product, according to the Consumer Financial Protection Bureau.

Regions Bank operates approximately 1,700 retail branches and 2,000 ATMs, with a footprint that spans across the South and Midwest, from Florida to Texas to Illinois. It is one of the country’s biggest banks with more than $119 billion in assets.

“We take the issue of overdraft fees very seriously and will be vigilant about making sure that consumers receive the protections they deserve,” said CFPB Director Richard Cordray.

The CFPB on Tuesday ordered Regions to refund consumers and pay a $7.5 million fine, the first such fine levied under new overdraft rules set for banks in the Dodd-Frank financial reform bill.

“After discovering that a small subset of customers had been charged fees in error, we reported it to the CFPB and began refunding the fees. We believe the vast majority of the refunds have been completed and we have made changes to our internal systems to resolve these matters,” said Evelyn Mitchell, Regions spokeswoman.

Overdraft fees average about $35, and can be charged when consumers write checks or make electronic payments, purchases or withdrawals that exceed the available balance in their checking accounts. Prior to Dodd-Frank, consumers complained that they were often automatically enrolled in pricey overdraft coverage, which could cause them to incur $35 fees on small debit card purchases that sent their bank balances only a few dollars into the red. Dodd-Frank requires banks to simply reject such transactions unless account holders have affirmatively opted-in to the coverage.

But Regions kept on charging a subset of consumers overdraft fees without their express consent after Dodd-Frank took effect in 2010, the CFPB said. Regions customers who had previously linked their checking accounts to savings accounts or lines of credit were not asked to opt in for overdraft coverage, and kept on incurring fees as high as $36 per transaction.

Thirteen months after the mandatory compliance date, the bank discovered its error in an internal review, but kept charging the illegal fees for an additional year, the CFPB said. Finally, in June 2012, the bank’s computers were re-programmed to stop charging the fees.

It’s been a challenge for the bank to identify all impacted consumers. In December 2012, the bank voluntarily refunded $35 million to consumers who wrongly paid fees. In 2013, the CFPB alerted the bank to more victims, and it refunded an additional $12.8 million. This January, the bank found even more victims. The consent order issued by the CFPB today requires the bank to hire an independent consultant to identify any remaining consumers who are entitled to a refund.

The bank is also accused of making nearly $2 million by charging overdraft fees in connection with its deposit advance product after promising it wouldn’t charge such fees. Consumers who agree to a deposit advance loan receive money in their checking account in anticipation of a future deposit, often a direct deposit. When Regions collected from consumers’ accounts, and the payment was higher than the available balance, the bank sometimes changed overdraft fees, despite saying it would not do so. Between November 2011 and August 2013, the bank charged non-sufficient funds fees and overdraft charges of about $1.9 million to more than 36,000 customers, the CFPB said.

The bank was ordered to identify and fix any errors on consumers’ credit reports related to the illegal overdraft fees, and to pay a $7.5 million fine. The CFPB warned that the fine could have been higher. (Consumers can check for errors by getting their free annual credit reports from AnnualCreditReport.com, and can watch for issues by getting their free credit report summary, updated every month on Credit.com.)

“Regions’ violations and its delay in escalating them to senior executives and correcting the errors could have justified a larger penalty, but the Bureau credited Regions for making reimbursements to consumers and promptly self-reporting these issues to the Bureau once they were brought to the attention of senior management,” the CFPB said in a statement.

More from Credit.com

This article originally appeared on Credit.com.

TIME

Why Bad Bank Service Means You Could Pay More

We want more attention, they want more money

In the wake of the financial crisis, the Feds put the kibosh on a whole slew of bank tactics pertaining to overdraft fees, interchange fees (which they charge merchants when you use a debit card and which stores say get passed along in the form of higher prices) and credit card interest rate hikes. To cope, banks closed branches, invested in technology so they could replace costly branches and tellers with computers, and started trying to coax their more affluent customers into shifting their borrowing and investing activities from other institutions.

At the time, these actions made sense. Banking industry trade publications and white papers were full of buzzword-y terms like the “360-degree customer view,” which encouraged banks to think of a checking account as the financial services equivalent of the $1.99 chicken breasts at the supermarket: A loss leader that could reel in customers who would then stick around and buy more profitable items (like, say, a home equity loan or brokerage account). And banks poured money into their online offerings, mobile apps and upgraded ATMs that — the thinking went — could deliver customer service at the fraction of the cost of a teller depositing money or checking a balance for a customer.

But it didn’t turn out like that, according to a new study from consulting firm Capgemini and banking trade association Efma. The World Retail Banking Report shows that positive customer experiences fell among North American bank customers. “Return on investments in the front- office and digital channels are struggling to keep up with evolving customer expectations,” the report says.

The advancements in technology just built up people’s expectations — especially for tech-savvy younger customers. “Across all regions, Gen Y customers registered lower customer experience levels than customers of other ages, reflecting the high expectations Gen Ys have of banks’ digital capabilities,” the report says. The fact that young adults are less satisfied than customers in other age brackets shows that banks aren’t keeping up with the technological times, and less than half of American Gen Y bank customers say they plan to stay with their current bank over the next six months.

And yet, customers’ embrace and expectation of digital banking didn’t put the kind of corresponding dent in branch usage banks were seeking. In fact, the number of people using bank branches in North America actually went up — hardly the kind of digital revolution banks were seeking. Seems we’d still rather deal with a human being for most kinds of banking activities because we don’t think the digital service is up to snuff. “Customers still perceived the branch to be offering better service than what could be found on the digital channels,” the report says.

Banks’ cost-cutting moves in the service arena did some serious damage to customer satisfaction, dampening customers’ inclination to deepen their relationship with their banks or recommend the institutions to others, another key component of banks’ post-reform moneymaking strategy. “Alarmingly for the banks, there was a significant increase in the percentage of customers who were unlikely to buy additional products or refer someone to their banks,” the report says. In North America, that figure jumped by more than 20 percentage points in just a year.

The report blames this on growing competition to banks from other products and services like Apple Pay, LendingTree and Starbucks’ prepaid payment platform.

What could this mean for customers? If you said, “more fees,” you just might be on the right track. According to research company Moebs $ervices, financial institutions have collectively lost roughly $5 billion a year in overdraft fee revenue alone (although, if this sounds like a lot, keep in mind that they still made roughly $32 billion off these fees in the year that ended September 30, 2014, compared to around $37 billion just before the new laws kicked in.)

Moebs also says bank and credit union net operating income as a percentage of assets fell by nearly 7% last year from the year prior, driven by a drop in revenue from fees. “Financial institutions need to assess why fee revenue is falling and develop additional sources of fee revenue to get net operating Income back on track,” Moebs economist and CEO Michael Moebs wrote earlier this month.

And that technology we’ve grown to depend on might be the way to accomplish this. One recent study finds that a quarter of bank customers say they’d pay $3 a month just to use their bank’s mobile app, a figure that goes up to about a third for customers under the age of 35.

“Customers are willing to pay for services such as credit monitoring, person-to-person transactions, personal couponing, identity theft protection, and related other services,” a recent banking trade publication article notes, saying that if banks get on the ball, they could more than make up their losses from that declining overdraft revenue — probably not what all those already-frustrated customers wanted to hear.

MONEY Kids and Money

The Best Way to Bank Your Kid’s Savings

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YinYang—Getty Images

After the piggy bank fills up, here's how to launch your child on the path of saving and investing.

When I told my 7-year-old that her wallet was getting full and it was time to open a bank account, her eyes widened. She wanted to know if she would be allowed to carry her own ATM card.

Um, no.

When transitioning from a piggy bank to handling a debit card linked to an active account, financial experts say it is best to start with a trip to a bank, but which one and when? Here are some steps to get started:

1. Bank of Mom and Dad

Don’t be in a rush to move away from the bookshelf bank, says financial literacy expert Susan Beacham. There are lessons to be learned from physical contact with money.

Sticking with a piggy can be especially effective if you teach your kids to divide their money into categories. Beacham’s Money Savvy Pig has four slots: save, spend, donate, invest.

When you cannot stuff one more dime into the slots, it is time to crack it open and seek your next teachable moment.

2. Neighborhood Convenience

Many adults bank online, but kids still benefit from visiting a branch, says Elizabeth Odders-White, an associate dean at the Wisconsin School of Business in Madison.

Do not worry about the interest, Beacham says. “A young child who gets a penny more than they put in thinks it’s magical. You’re not trying to grow their money as much as grow their habits.”

Your second consideration should be fees. Your best bet may be where you bank, where fees would be determined by your overall balance and you could link accounts.

Another option is a community bank, particularly a credit union, which are among the last bastions of free checking accounts.

“The difference between credit unions and banks is that credit unions are not-for-profit and owned by depositors,” says Mike Schenk, a vice president of the Credit Union National Association.

At either type of institution, you could open a joint account, which would be best for older kids because it allows them to have access to funds through an ATM or online, says Nessa Feddis, a senior vice president at the American Bankers Association.

Or you could open a custodial account, for which you would typically need to supply a birth certificate and the child’s Social Security number. Taxes on interest earned would be the child’s responsibility, but likely would not add up to much on a small account. A minor account must be transferred by age 18 to the child’s full control.

3. Big Money

If your child earns taxable income, the money should go into a Roth individual retirement account, experts say. There is usually no minimum age and many brokerage firms have low or no minimums to start an account. You can pick a mix of low-cost ETFs, and let it ride.

Putting away $1,000 at age 15 would turn into nearly $30,000 by age 65, at a moderate growth rate, according to Bankrate.com’s retirement calculator.

Not all kids can bear to part with their earnings, but there are workarounds. One tactic: a parent or grandparent supplies all or part of the funds that go into the Roth, akin to a corporate matching program.

The other is to work with your child to understand long-term and short-term cash needs. That is what certified financial planner Marguerita Cheng of Blue Ocean Global Wealth in Potomac, Maryland, did with her daughter, who is now in her first year of college.

While mom and dad pay for basic things like tuition, the teen decided to pool several thousand dollars from her summer lifeguard earnings, money from her on-campus job and gifts from her grandparents to fund several educational trips.

“She would make money investing, but it’s only appropriate if you have a longer time horizon,” says Cheng. “It’s not even about the money, it’s the pride she gets from paying for it herself.”

MONEY Banks

The Government Will Publish Your Banking Nightmare Story

The Consumer Financial Protection Bureau will start including the tales behind your banking complaints on its website.

MONEY Banking

The Easiest Way to Reduce the Bank Fees You Pay

Where to find free checking
James Worrell—Getty Images

Shift your money over from a big bank to a credit union

Looking to avoid those annoying—and expensive—monthly fees on your checking account? You might want to take your funds to a credit union.

A survey released Thursday by Bankrate.com found that 72% of America’s largest credit unions still offer standalone free checking accounts. And another 26% waive fees if customers meet certain requirements, like accepting e-statements or opting for direct deposit.

Credit unions look ever more attractive compared to the nations biggest retail banks—only 38% of which now offer free checking, down from 65% five years ago.

Even when credit unions do levy checking fees, those charges are typically between $2 and $3, about half of what traditional banks will deduct.

Prone to overdrawing your checking account? You’d do better at a credit union on that count, too. The average overdraft fee at unions is $26.78; the average for banks: $32.74.

In spite of the potential savings, however, a credit union isn’t right for everyone. Find out if you could benefit from becoming a member by checking our guide. And find a credit union that offers free checking with this list compiled by Bankrate.com.

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