A 1,000% fee just for buying a fast-food burger? In our shift to a cashless society, the banking industry has evolved from our financial servant to our master.
[Related content: banking, financial privacy, debit cards, credit cards, credit card fees]
Born-again Democrats recently made a big to-do in reining in credit card industry abuses. To really safeguard our interests, the new U.S. Consumer Financial Protection Agency now needs to halt the banking industry's coup in progress and the means of its power grab: the debit card.
Being able to whip out a debit card for virtually any transaction is so convenient. Yet in promoting our evolution to a cashless society, banks have commandeered and privatized the nation's payment system, and they profit mightily on all types of purchases, down to buying a candy bar.
The industry's initial aim was to reduce cash-handling, check-clearing and accounting costs via electronic transactions, including direct deposit of paychecks and automatic withdrawals for bills and expenses.
Its ultimate windfall: While reaping those savings, it now generates billions in fee-based income -- and we've all sacrificed financial privacy in ways we've not yet even begun to fathom.
Used to be debit card purchases wouldn't go through without sufficient funds in a cardholder's account. Then opportunistic banks realized that, with direct deposit, they could recoup the overdrawn funds the instant their clients' next payroll checks rolled in.
The upshot: Banks may impose a $35 fee for "overdrawing" on a $3.50 fast-food purchase -- and have vigorously fought efforts to provide electronic warning of the debit card overdraft at the point of sale. The equivalent interest rate for your $3.50 lapse: 1,000%.
Here's more to consider:
The double standard on account theft. Credit card holders aren't on the hook for fraudulent use of their card numbers and can challenge charges on goods and services not delivered as promised. Debit card holders aren't guaranteed those same protections.
The reason: It's the lenders' money on the line with a credit card transaction -- and just our hard-earned savings with debit card fraud. They'll absorb the cost of investigating and prosecuting theft of their money, but they don't want to pick up the cost of policing the theft of ours -- by identical means through their very same hands.
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Credit card borrowers are never out more than $50 regardless of when they discover potential fraud. Debit card holders' liability is limited to $50 only if they report perceived fraud within two days; the liability jumps to a maximum $500 from that point to 60 days and is unlimited thereafter.
Vanishing gift-card balances. When consumers buy gift cards, they essentially give retailers an interest-free loan until the recipient uses the card, rather generous when you think about it. Yet on many cards, in small print, is the caveat that the card's value is wiped out if not used by a certain date.
What the hell? Cash value should never vanish, whether in hand or in stored electronic chits. Whoever let our payment system get boarded by Somali pirates?
(This is already illegal in some states. See your state's rules.)
Video on MSN Money
CNBC's Bertha Combs looks at the shock waves the new rules will send through the card industry.
How we got snookered
The Federal Reserve under Alan Greenspan championed the banks' aims, since it cost the Fed a nickel to process checks through its transfer system versus a penny for electronic transactions. To Greenspan, the cost savings for the Fed justified the unprecedented turnover of the payment system to the banks.The IRS, meanwhile, loved the personal record the shift to a cashless society produces because it reduces the undocumented flow of cash through the "underground economy." We've improved the likelihood the government will collect on taxes owed, but at what societal cost?
Continued: The demise of financial self-discipline
The debit card's predecessor, of course, was the ATM card, whose initial selfish aim was to eliminate the need for bank tellers and associated labor costs. We gained access to cash after banking hours in the 1980s and -- thanks to direct deposit -- never had to wait in long lines during Friday lunch hour to cash payroll checks. How great was that!
Thus began our drunkenness on electronic transactions and the demise of our financial self-discipline as we too liberally dispense with our limited savings simply because they're so readily accessible. That's just as the banks intended when they shifted from making money off how they invested our deposits, and began vigorously promoting our spending for the fees it generated.
Debit card practices now need some immediate curbs to turn the banking industry back into our financial servant rather than our master:
- Notice of deficient funds. Realizing its debit card overdraft fees are blatantly usurious, the banking industry has been open lately to possibly letting account holders "opt out" of the ability to overdraw accounts. Consumer advocates want the policy to instead be "opt in," meaning account holders have to agree to accept overdraft levies. The simple compromise: Notify cardholders at the moment of transaction that they'll be overdrawn and let them decide whether they want to pay the fee or cancel the transaction.
- Same theft protections as credit cards. Whether it's their money on the line or our own, banks must afford debit card transactions the same theft protection they do for credit cards.
- An outright ban on a dangerous ''next-gen" card. When retailers ask "credit or debit," it's merely a question of how consumers want the transaction processed; the funds still come out of their bank accounts. What must be banned outright: allowing banks to offer a single, combined debit and credit card that defaults to the latter if there are insufficient funds in one's bank account. That would be the industry's Holy Grail, and we can't let them hand us that arsenic-laden cup.
Video on MSN Money
CNBC's Bertha Combs looks at the shock waves the new rules will send through the card industry.
America's entire payment system needs immediate scrutiny and reform to map out where it's headed. If not, we might as well cede the future of the world to the burgeoning Chinese middle class, which isn't likely to blow banked, hard-earned yuan in an instant just because it has the ability to do so.
That effort will fall to the Consumer Financial Protection Agency, which will take over regulation of consumer-lending products and practices now overseen by various federal banking regulators, if Congress passes current legislation.
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The rub: The primary focus of those banking regulators -- which are funded and lobbied hard by the banks -- is ensuring banks' safety and soundness, and we've seen what a great job they did there. It's now time for federal authorities to look out more for the safety and soundness of our modest little accounts.
Chris Pummer is a former senior editor for MarketWatch and Bloomberg News and a reporter for such papers as the Los Angeles Times and San Jose Mercury News.
Published Aug. 7, 2009
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