Debit Card Overdraft Fees Getting Federal Attention

The Federal Reserve has had it with fees on debit card ATM and retail transactions. Banks have been allowing consumers to withdrawal more than their account balance and/or make purchases that cause their account to overdraft. These banks then charge the consumer significant overdraft fees.

I’ve always been a big fan of debit cards, since I never carry cash. I like that the money comes directly from my account and isn’t loaned to me on credit. But, lately there’s been a bit of stretching of the debit card function. Some banks allow consumers to draw more than the balance of their card and let purchases overdraft all with the intention of collecting fees. If you ask them, they’ll say they are just being nice, but if you ask the Feds they’ll call it something quite different.

Fortunately, your credit union debit card has not been a part of this. Your credit union debit card is a true debit card. Your spending power is confined to the amount of money in your account. There aren’t any sneaky practices to drain you of your hard earned money.

But the practice isn’t going away. Now consumers will be notified that they must opt-in to allowing overdraft transaction (which would then cause a fee to be issued). So for those of you who like to add $32 fee to your $4 overdrafted specialty coffee purchase, just say “yes” to fees. For me I’ll stick with the credit union honest debit card.

Courtesy or Bad Manners? What's your opinion?

Once upon a time, I overdrafted my account while paying for something at a local college bookstore. It was so long ago that I can't remember how I paid but it must have been by check. The manager called me at work (I don't remember why she would have my work number) screaming at me. She yelled explicatives and spoke as if I were a criminal or completely stupid. I remember saying to her, "Do you mean to tell me that you've never made a mistake and overdrafted your account?" That question completely disarmed her. Of course she had, who hasn't!

Although I got control over the situation, I was still embarrassed. And, obviously this left it's mark on me. At that time I was managing my money through one of the big banks. I didn't have automatic overdraft protection and didn't really know much about it. Years later I started working for a credit union and learned more about overdraft protection and all of it's glorious virtues. Then one day courtesy pay was introduced ...

Courtesy pay will cover your overdraft discreetly. If you don't have the funds in either your checking or overdraft account (typically your savings account) the transaction will be funded anyway. But there is a catch. That courtesy will cost you a fee. The amount of the fee varies from $20-$35 depending on the financial institution. Both banks and credit unions offer courtesy fee.

The courtesy pay fee created mild controvesy but over time courtesy pay became accepted as a convenience. Now the controversy heats up again as less people and even less merchants deal with checks. Debit cards are now king because of the simple beauty that they pull funds from your checking account in almost real-time. The understanding was that if there wasn't cash the transaction would be declined.

But, more financial institutions are extending courtesy pay to debit card transactions. I wish I could say that it's just banks doing this, but that's not so, some credit unions also partake.

To be totally fair, not all debit transactions are always covered by courtesy pay. Point-of-purchase transactions often are not covered. That means if you are at, say for example, Target or an ATM your debit card can be declined. But, if you are shopping online, like at Target.com, and you've entered in all the debit card info including the security code on the back of the card that could be considered an "authorized" transaction and could be funded by courtesy pay. So in-person you might be declined, remotely you might not be declined. These are solid rules though, it could go either way depending on the discretion of the financial institution.

So what do you think, is it a courtesy or bad manners?

Plastic vs. Paper: Another Debate

Used to be that whenever I got in line at the grocery store I started sweating over the old "paper or plastic" question. It's a trick question because as we now know both answers are wrong. BYOB--that's what they really want to hear. But now the plastic vs. paper debate has invaded the paycheck.

Many companies are switching over to debit card payroll systems. Instead of receiving paper checks employees get what looks like a debit card loaded with their pay.

Here's what some debit card payroll providers have to say:
Payroll Debit Cards allow business owners to streamline the payroll process, saving time and money, and eliminating the need to issue paper checks. Using payroll debit card enhances the employee experience by cutting the fees and hassles associated with cashing paper checks.

All of your employees, regardless of financial status, can enjoy the benefits of this payroll card.

...your employees will also avoid check cashing fees and the insecurity of carrying cash.

Okay, let's cut through the marketing. For employees the payroll debit card stinks. It stinks bad. This bad:

1) The statement that these cards are good for all employees regardless of financial status is wrong. These cards further discourage employees who use check cashing services from opening a regular bank account. It encourages poor money management.

2) It discourages saving. The card can be used to get cash from an ATM or to make purchases.

3) FEES! Yes, I'm screaming. Typically the card will not be drawn from a local bank. Therefore, whenever the employee wants to get cash they will need to pay an ATM surcharge fee. Plus, some cards carry monthly maintenance fees since they are not intended to be just sitting around.

4) Debit cards can still be confusing or intimidating to some people.

So who uses these cards to pay employees? Mostly large companies that employee many part-time employees you know like high school kids, retirees, foreign born workers.

There is a way around payroll debit cards. It's direct deposit. With direct deposit everybody wins. Employers don't have to cut checks. And employees are encouraged to manage their money through a financial institution.

One misconception about direct deposit that employers and employees need to know: You don't have to have checks to sign up for direct deposit. What you need are the routing, transit and account numbers. That's what the accounting department uses to set up the electronic payroll transfer. But accountants like to be exact. So to avoid confusion they always ask employees to provide a check. More people, especially young or part-time employees don't need or want checks. For those people--you can get the teller or member service rep to print a formal document that shows the routing, transit and account numbers in an official format that makes the accountants happy.

So when an employer asks you "paper or plastic payroll" it's still a trick question just like the grocery store. The real answer is direct deposit.