Beating Broke

Personal Finance from the Broke Perspective

Are Banks Getting a Bad Rap?

By 5 Comments

As I was traveling to the Financial Blogger Conference a few weeks ago, all the news was talking about how Citi had announced that they would be charging more fees on debit cards.  In fact, there have been quite a few banks that have announced an increase in fees over the last few weeks and months.  There are very few that have free products like free checking or free savings anymore. All told, there’s a lot of anger aimed at the banks right now.  But, is it all their fault?  Or, are they getting a bad rap? Let’s examine where all of this fee increase stuff is coming from.

Durbin Amendment of the Dodd-Frank Wall Street Reform Bill

The Dodd-Frank bill did quite a bit, but the bit we want to look at is the Durbin amendment.  The Durbin amendment was an amendment added with the intention of creating some competition in debit card processing fees.  Specifically, it’s goal was to “To ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred, and to limit payment card networks from imposing anti-competitive restrictions on small businesses and other entities that accept payment cards.”

Which doesn’t really explain it all that much.  I’ll try, but no guarantees that you’ll be any less confused. (NerdWallet does a really great job of explaining it, actually.) When a credit card/debit card is used as a payment, it gets swiped through a reader.  The reader reads the data, and then sends the data along with the purchase data to a card processor.  The card processor then routes the data and purchase data to the institution that holds the account the card is attached to.  So, a Ally bank’s card and transaction would get routed to Ally bank.  The institution accepts or declines the transaction and sends that back to the card processor.  The card processor sends that on to the merchant.  For it’s (necessary) work as the middleman, the card processor charges an interchange fee.  Basically, a fee for all the routing it did.  The Durbin amendment put a cap on how much that fee could be.  The end result is that some of the larger card processors have to charge larger fees.  Fees that are paid by the banks.  The banks had two options.  They could charge the merchant a larger fee to make up for it, or they could start charging fees to the user (that’s you) and cease many of the “free” programs that were previously supported by the profit margin they were making on the cards.
The U.S. Capitol
If they had passed all of the larger fees on to the merchant, many merchants would have likely stopped taking their cards.  So, believing that the majority of users would lay down and take the extra fees and loss of “free” accounts, they passed the added fees on to the user.  Again, that means you.  What they didn’t count on was the size of the backlash they would get from the added fees.  An educated user base, that has direct access to so many public outlets like social media, is making far more out of the situation than they ever thought would happen.

Does it really mean anything?

Here’s the funny part.  (not really)  There will be a small percentage of users who will move their business to Credit Unions and online banks who are absorbing the added costs and keeping their “free” accounts without adding any additional fees.  But, the majority of users will pay the fee, complain about it, but, ultimately, do nothing.  The new fees will become normal after a year or so, and things will continue on like they were before.  Just with less “free” accounts and more fees.

You should be mad as hell!

But, not at the banks.  They are merely doing what makes the most business sense to them and trying to maintain their profit margin.  Credit Unions don’t work on a profit margin because they are not-for-profit businesses.  Online banks have a higher profit margin due to not having any physical buildings and fewer staff.  The people we should be mad at are our representatives in Washington.  There’s a bill about to be introduced in the House of Representatives that aims to repeal the Durbin Amendment.  If you feel strongly enough against the fees, you should send your state’s representatives (house and senate) a note (or make a call, email, whatever) and tell them you support the repealing of the Durbin Amendment.

Whatever you do, don’t just lay down and take the fees.  Call, email, or write your representative.  And, in the mean time, find a Bank or Credit Union that isn’t passing the added costs on to their users.  Open an account at one of them and move your business.  My personal favorites are ING Direct, Ally, and PerkStreet,  but a local Credit Union would be great too.

photo credit: kevin dooley

The Slippery Slope of Float

By 12 Comments

In the financial sector, there is a term that you have likely heard before.  That term is Float.  I’ll try to define it as it pertains to this article.

Float – To use known time delays in processing of financial transactions to allow for extended time to cover cost of transaction.

Much like any other financial term, there are some good and bad ways to use float.  One bad way, is actually illegal in some places.  That’s the “check float”.  In a “check float” a person writes a check to themselves from an account they have at one institution and deposits it in an account they have at another institution in order to inflate the balance at the second institution and cover any outgoing transactions that would have otherwise been returned.  They then write a check from the second institution to themselves and deposit it in the first institution a day or so later to cover the first check.  It’s usually illegal because the person is technically writing bad checks.  Eventually, it will catch up to them, and they’ll get caught. It should also be noted that with recent Check 21 regulations, checks process much quicker than they used to and have cut back on this practice.

SlideThere are less criminal ways to take advantage of float, however.  For instance, at my institution, I know that there is a delay between when I tell the bill pay service to send a payment and when it actually is deducted from my account.  Because I know that, I can sometimes send a payment a day or two before I am paid in order to make sure the payment gets where it’s going on time.  People who get paid on the 1st and the 15th will sometimes get paid earlier when the payday lands on a weekend.  That’s a kind of float as well.  In some ways, a payday loan is a type of float (legal, but should be criminal in my opinion).  People go to a payday loan institution and get a short term loan (float) to gain access to funds before they are paid.  When they are paid, they pay off the balance of the loan along with some high-interest and fees.

Using float can be a very slippery slope.  In some cases, it’s just illegal and should be avoided.  In others, like payday loans, it should be illegal, or heavily reformed.  Other uses, like my bill pay example, are more innocent.  But, all of them can lead to trouble if the user isn’t careful.  Using float once in a while can be fairly safe, but repeated use can often find you in a hole that you dug for yourself.  In almost all cases, the necessity of float can often mean your spending has outstripped your earning.  Use float sparingly, and legally, and you can avoid the slippery slope.

photo credit: marktristan

Flossing with Chest Hair

By 12 Comments

Being a frugaler means making some sacrifices.  We sacrifice in order to save a few bucks.  Sometimes, it becomes a bit of an addiction.  We get a small high off of the act of saving.  While you can certainly have worse addictions, even an addiction to saving can be a bad thing at times.

Taking Frugal to Extremes.

Before you get any funny ideas, I really should let you off the hook.  This post isn’t really about flossing with chest hair.  (It’s a catchy title though, isn’t it?)  I don’t actually know of anyone ever having flossed with chest hair, nor would I suggest it.  But, it serves as a good example of a way that people could take saving to an extreme.  There’s a growing movement to do things in a sustainable manner, and using things that are renewable (like chest hair) is a big part of that.  But, there are extremes.  For instance, I’ve read about people who use a special kind of stick that is very fibrous, and they chew on it instead of brushing or flossing.  Some things, I’d just rather pay for.  Being frugal is good.  Being so frugal that you chew on sticks?  I’m not going to judge, but it seems a bit too extreme for me.

Finding a Happy Frugal Medium.

There is seldom a cure to any addiction.  Overcoming one usually entails years of counseling, and hard work on the part of the addicted.  Part of the treatment is usually to completely forgo whatever it is that you’re addicted to.  If you’re an alcoholic, drinking any alcohol at all is forbidden.  But, I can’t, and won’t, condone abstaining from frugality.  Overcoming an addiction to being frugal is just a matter of finding a happy medium where you can still save money, while still living in a way that doesn’t have to include extreme cutbacks.

Thinking..

The Cure to Extreme Frugality.

Without thinking about it too hard, come up with something that you spend money on that you can’t do without.  Again, I’m not going to judge.  For some, it will be their car.  For others, it will be their morning coffee.  Now, come up with something that you currently spend money on that you can do without.  For some reason, for most people, it’s harder to come up with something we can do without than it is something we can’t do without.  Why is that?  The answer is that it’s psychological.  As frugal people, we’ve thought long and hard on ways to save money and to pay off our debt.  In our minds, we’ve analyzed everything that we spend money on.  We then justified everything that we spend.  In some of those cases, we’ve created justification for ourselves so that we don’t have to get rid of something that we would rather not.  So, it’s harder to find something that we know we can do without because, in our minds, we’ve created a justification that makes it something we need.  The cure to finding a happy medium and avoiding the extreme frugal addiction is to take a close look at the things we’ve justified and find those things that we’ve created justifications for that really aren’t all that justified.  In short, stop lying to yourself.  Once you do, you’ll have found several things that you can cut back on, or remove entirely, that will save you money without going to extremes.

It’s just as hard to overcome the addiction of lying to yourself as any other addiction.  There should (and maybe is) be a 12-step program for it.  Until then, try and be truly honest wit yourself.  Understand that you’ll probably slip up once or twice.  That’s forgivable.  Just recognize that you’ve slipped, and get back on track.

photo credit: Just Add Light