How Traditional Banking Practices Can Make You Poor
There are certain specific connotations with the word bank: impressive marble-floored buildings with high counters, smiling tellers, and huge vaults. Not to mention cash, free coffee, and, if you’ve got a particularly friendly local bank branch, cookies for the kids.
But the banking industry is changing. We no longer count on our brick-and-mortar branches for all of our banking needs. According to a recent American Bankers Association survey, 39% of Americans use internet banking most often in order to manage their bank accounts — and this was the most popular banking method by far.
But one of the things that happens when technology changes is that people start looking at traditional practices with a critical eye. In fact, looking closely at traditional banking practices can really drive home the fact that those practices are skewed to benefit the banks, rather than the customer. If you’re not careful, banking with a more traditional institution can really make you poor.
Here are two traditional practices that banks have in place that negatively affect your finances — and what types of better policies you should look for in a more modern bank. (See also: 12 Annoying Bank Fees and How to Avoid Them)
Earlier this month, a deposit had not yet cleared my account, which meant that a debit card purchase I made overdrew my checking account. The overdraft protection my bank offers is tied to my savings account. If I overdraw checking, then the amount necessary to cover the overdraft is automatically taken from my savings account.
This seems like a great policy on the surface. As long as I keep money in my savings account, my checking account overdrafts are covered. The only problem is that I get charged $35 when this happens. I personally would be happier to have my debit card declined. It would be a much cheaper option.
Luckily, I happened to log onto my online account that day and saw the issue before it was “officially” posted and I still had time to correct it. I manually transferred money from my savings account to checking and managed to avoid the fee. But most people don’t check their checking account balances once or twice a day for fun. (Seriously, I do it in the same way some people play Angry Birds — as a welcome distraction from work.) For many individuals, the helpful overdraft protection service is an expensive headache.
Granted, as of July 2010, banks are no longer allowed to automatically sign customers up for overdraft protection services. (In fact, as of that year, the Federal Reserve ruled that banks must drop the service for customers who never requested it in the first place.) Banking customers must opt into the service — and banks have tried very hard to persuade them to do so.
Considering the fact that this service appears to be a courtesy, it’s no wonder that many banking customers still opt in. According to Suzanne Kapner of Financial Times, as of February 2011, “about 100 million of the 130 million US checking account holders are on track to pay overdraft fees on ATM withdrawals and debit cards [in 2011].”
That’s an expensive “service” that many banking customers are paying through the nose for.
The Better Way
Right now, anyone can tell their bank that they do not want the courtesy of overdraft protection. That means your debit card will be declined if you go over the amount you have in your checking account, which might be embarrassing, but is at least free.
However, there are some banks that are offering other options that will help you both save face and save money. For instance, the online retail bank startup Simple (previously BankSimple) helps customers remember more clearly what their “spendable” balance is:
To relieve people of the off-the-top-of-their-head calculations they might have to make when checking balances, the interface prominently displays a "safe to spend" balance, which deducts amounts set aside for goals, upcoming bills, and card debits that have not yet been processed.
This innovation will make overdraft protection much less necessary, as customers will no longer have to rely on mental calculations to determine whether they’ve got enough money in their accounts to cover groceries and beer. They’ll know to put the groceries back if funds are lacking.
While Simple’s straightforward information will not solve all the problems associated with overdrawing your account, it will certainly help those account holders who have better things to do than balance their checkbook to keep a tighter rein on their finances. And it’s an innovation that only requires a little computer programming on the bank’s part but makes a huge difference to the customer.
Anyone who has ever rushed to the bank at 4:58 with an important deposit only to bang ineffectually on the already-locked doors knows that bankers’ hours are for the birds.
While most national, regional, and local banks have been offering extended weekday and weekend hours for the greater part of the last decade, that does not necessarily change the problem with “bankers’ hours.” For instance, I deposited two checks to my account at our local branch around noon on a Saturday. My local bank is open until 2 p.m. on Saturdays, so I used a teller for my deposit, which I generally understand is the fastest method for getting a deposit into my account (at least compared to an ATM or drive-through teller deposit.) However, as of the following Tuesday at close of business, the checks still had not cleared.
As that ubiquitous and frustrating experience shows, bankers’ hours are about more than just what times of day you can talk to a teller. Checks generally take at least one business day to be posted to your account, and often they will need more than one business day to clear.
The length of time that it takes for a deposited check to clear was regulated in 1987 by the Expedited Funds Availability Act, which standardized the length of time that commercial banks could put a discretionary hold on checks of varying dollar amounts and sources. This law was put in place to both protect banking institutions from bad checks and to serve the needs of customers. However, banks can work within the law to use your deposited money to earn itself profit, while still keeping that money from entering your account until the end of the “hold” period. According to SelectCDRates.com:
Even when a bank is able to clear the funds for a check in a shorter time frame than outlined in the federal regulations, it is not obligated to release the funds to your account. The bank can still clear your deposit expeditiously, not credit it to your account until the maximum allotted time, and reap the profit by using your money during this time period. While all regulated banks are subject to the same maximum hold periods established by the law and the rules issued by the Fed, each bank may make deposits available sooner.
Basically, the traditional banking model asks customers to take time from their 9-to-5 day Monday through Friday (except for federal holidays) in order to get their deposits and other banking business taken care of at a branch, only to then hold onto the deposited funds for the maximum allowable time before putting it in the account.
This is a great way to get overdrawn.
(And boy does the bank have a service to help you out of that overdraft jam!)
The Better Way
We live in a much different world from the one where bankers’ hours were first invented. Not only do bankers no longer wear handlebar mustaches and sleep in three-piece suits, but the world also no longer shuts down after sunset. We need to be able to handle our banking needs whenever we’re awake, which includes the dinner hour, midnight, the wee hours of the morning, and weekends and holidays.
Banks have been trying, bless their little hearts, to accommodate the modern 24-hour lifestyle. Between extended branch hours, drive-up tellers, ATMs, online banking, and mobile banking, there is a great deal of banking we can now handle whenever we like. However, that does not fix the real problem with bankers’ hours — availability of deposited funds. It’s all well and good for me to be able to see a teller on Saturday morning, but if the hold on the check I deposit isn’t even instituted until the following Monday, I am just as stuck waiting for my money to clear as I would have been if I’d deposited the check on Monday.
However, banks are starting to offer some technological solutions to this problem. In particular, iPhone and smartphone check deposits seem to be a potential way for banks to make funds available more quickly. According to Ann Carrns of The New York Times, the Bank of America mobile funds app allows you to access the funds from your smartphone-deposited check within one day: “Funds deposited by the mobile app show up immediately on your account, but aren’t available for withdrawal until the next day.”
While Carrns does not specify if next day must be the next business day, this still does give hope for the future to banking customers. (Who would have imagined the words "Bank of America" and "hope for the future" could be written in the same sentence?) While banks certainly have the right to protect themselves from fraudulent and bad checks, we can hope that the advances in technology will allow them to provide us with access to our funds earlier. After all, we deposit the money in our accounts so we can use it, not so the banks can hold onto it.
The Bottom Line
Banks need to change with the times. When we were all writing paper checks to pay our bills and paying for all of our purchases in cash, it was easier for banking customers to keep careful track of their expenses, and less of an issue to wait for deposits to clear. It was a slower world.
These days, purchases and paid bills post almost immediately to our accounts. We need more reliable information from our banks and we need them to be lighter on their feet. Banks need to know that they cannot simultaneously profit from the sped-up pace of finances and pretend that life’s still slow as molasses with their customers. We demand more from them.