Beating Broke

Are Banks Getting a Bad Rap?

October 19, 2011 By Shane Ede 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.

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

October 14, 2011 By Shane Ede 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.

There 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

A Simple Technique to Help Parents Meet Their Savings Goals

October 12, 2011 By MelissaB 15 Comments

Having kids is not cheap. There are many expenses that are associated with small children that are hard to get around no matter how frugal you are. For instance, if you are a dual income family, you must pay for daycare and disposable diapers as most daycare centers will not accept cloth diapers. In our area, daycare for an infant can run a family $1000 a month. You may rejoice when your child enters preschool because you will find an extra $1000 a month in your pocket. Instead of just absorbing that money back into your budget, why not earmark it for something else?

Imagine if you took that $1000 a month and invested it? That is $12,000 a year! You could continue to pay it to yourself, perhaps setting up a college fund for your child with the money you used to pay in daycare. In five years, you would have $60,000. After that, just let it sit and earn interest for the next eight years, and your child’s college education would be largely paid for.

What if one of the parents decides to stay home to care for the children, in part to avoid expensive daycare? They may not have the $1000 a month to put away. While this is true, there are still plenty of other expenses associated with young children that you eventually won’t have to pay. For instance, we are paying roughly $75 a month to diaper our two girls, and I anticipate within the next 6 to 8 months, both girls will be out of diapers. It would be very easy to just absorb that $75 back into the budget, but that isn’t what I plan to do. Instead, I plan to set up a college education fund for my kids and invest that $75 a month. Yes, $75 a month will not add up very quickly, and it certainly won’t put even one of my children through college. But it is a start, and it is more than we are putting away right now.

Likewise, if you have a monthly car payment, when the car is paid off, use that money to pay yourself a car payment so you can pay for your next car in cash. If you bought a car 7 years ago, and had a monthly payment of $475, and you paid off the loan in four years and continued to make that monthly payment, you would now have $17,100 set aside for a new car, which would be enough to buy a nice, one to two year old car for cash.

You may argue that the car payment or the daycare payment was a hardship and that now that you no longer need to pay those payments, you need the money to pay for other things. This might be true, but if your child was still younger than preschool age, you would find a way to make the payments because you would have to. Or, if you now have other expenses for your child such as after school care for $300 a month, deduct that from the $1000 you used to pay for daycare and save the remainder. If you can maintain that mindset, you will find yourself reaching your financial goals quicker than you imagined, simply by not seeing that money as “free money” to now spend as you will but rather as money to continue to invest in your and your child’s future.

photo credit: Pink Sherbet Photography