No business can stay in business if it cannot make a profit. If you started a business, would you continue to provide your service or products if you had to pay your business expenses out of your own pocket? Of course, no! So when we talk about banking, we must first understand that banks are businesses and that the purpose of a business is to make a profit.
The service banks provide is to keep your money safe while it is in their care. Checking and savings accounts are known in banking as DDA, demand deposit accounts. This means that when you put money into your account, you have the right to withdraw it from the account. But understand, you can only take out what you put in.
Electronic banking (debit cards and ACH transactions) greatly increased the opportunities to collect NSF fees, because people got used to using “floating” or “kite” checks. Under the old manual banking system, the float could be up to 7-10 days for out-of-town checks. If a check was sent to pay an invoice, it took 2-3 days for the payment to arrive. The company then had to deposit the check into his account at his bank, which meant it was probably deposited the day after he arrived. Then if your account was at a different bank, your check had to be sent to your bank and it would probably be deducted the next day. Therefore, it was easily possible to allow 3-5 days before the check was cleared from your account. Most people knew this and had the time to wait a couple of days before depositing money into their account.
However, the bankers made a strong argument to Congress that the check should be counted as a prior day transaction because the recipient processed it a day or more before it was deducted from the payer’s account. This resulted in the federal law known as Check 21. It gave banks the right to process checks that had been presented for payment on a prior day as prior day transactions FIRST, before processing deposits and checks presented on processing day. This greatly increased the possibility of NSF fees for people with the “float”.
Remember, checking and savings accounts are demand DEPOSIT accounts. No customer has the right to use funds that they have not deposited prior to the transaction. Until we understand and accept this, we cannot understand why NSF fees have become a major source of profit for banks.
Electronic banking greatly increased the chances of overdrafts when transactions are completed before deposits. Debit card transactions used to be a great source of profit for banks until Federal Law prohibited banks from charging overdraft fees for debit card transactions, unless the customer opts out of that protection. ACH transactions are direct electronic deductions from a checking account. Pre-authorized monthly transactions are typically ACH debits. If you forget that you authorized a payment and the money is not there, here comes the NSF fees.
Now why are NSF fees so high? There are a couple of reasons why they are in the price increase category. First, the courts and the government refuse to ban NSF fees. Why? I do not know. Therefore, it seems that banks feel they have immunity from these fees and keep raising them more and more. Second, government banking regulations have taken away many traditional sources of profit from banks, thus increasing NSF fees to increase their revenue.
What can you do to prevent NSF fees from being applied to your account? It is a very simple principle. Never write a check, authorize a debit, or use your debit card unless the money is already in your account. This system works all the time.
It is unfortunate that the least informed and disciplined people in the management of their accounts are those who provide much of the income to the banks.
By the way, let me remind you how your debit card transaction can cause fees for insufficient funds. Banks process transactions at the end of the day in this order: credits from the day before, debits from the day before; credits the same day, debits the same day. And they process the largest transactions first, then in descending order from highest to lowest. So if you make an overnight debit card purchase for $ 100 and a check for $ 75 is presented for payment tomorrow, the debit card transaction will be paid first. Suppose your balance is $ 78 … enough to cover the check. But, the debit card transaction is processed first, overdrawing your account. Of course, a debit card overdraft cannot be charged a NSF fee. BUT, the check for $ 75 will further overdraw your account and WILL RESULT in an overdraft fee! Oh!
Now, suppose that on the same day there are checks for $ 55, $ 32, $ 25, $ 19, and $ 5.00 also presented for payment. This will result in 6 NSF fees. Most banks have a policy of a maximum of 6 NSF fees per banking day. Very kind of them. If your bank charges $ 35 for overdraft transactions, you will be charged a total of $ 210 for 6 NSF fees. You must deposit that amount into your account, plus enough money to cover the negative balance in your account. If you don’t do so within 90 days, most banks will close your account and send the full amount to a collection agency.
Would you like to actively participate in reducing bank income? You can !!! Just follow the principle: if the money is not in your account yet, don’t spend it. Responsible money management on your part reduces your contribution to your bank’s profits. Be happy!