Wheaties for Your Wallet

Original photo by Mike Pedroncelli

Is ING Direct running credit checks on all of the customers for its innovative new “Electric Orange” online checking accounts — and booting the people who don’t meet its criteria? In the Smart Banking group, Wesabe user BillM reports that he was signed up for and got an ING Direct Electric Orange checking account, but then was told ING was closing his account based on his credit score:

I received an e-mail from ING yesterday at 4pm informing me that they had obtained my credit score from a consumer reporting agency and had decided to close my Electric Orange account and reduced my overdraft line of credit to $0. […] They had made a decision and had no intention of reversing it, despite the fact that their major pitch in advertising the Electric Orange account was that they would not, in their own words, “Ding your credit with an inquiry”. […]

I got another representative who explained that the institution had recently decided to exercise its right under the disclosure agreement and run credit checks across the board. I assume they decided that they had openened themselves up to a great deal of financial risk by giving everyone who opened an account an open ended $165 line of credit. […]

I have closed my ING accounts and transferred my money to an institution that treats its customers with a little more respect and courtesy than what they afforded me in this situation. I doubt that my little piece of business will make much of a dent in their profitable operation, but I feel an obligation to let everyone know about what I consider to be a dirty, underhanded trick.

The whole thread is well worth a read if you’re considering an Electric Orange account.

ING Direct has long boasted about its policy of “firing” customers in order to keep their costs low. They argue that this allows them to provide better value for the customers that fit its model, while cycling out those that don’t. I’m perfectly fine with any company saying that they do or do not offer a product or service, and it certainly makes sense for a business to focus on their specific products or offerings rather than trying to be all things to all people. But, I think it’s downright dumb to talk about how you’re “firing” your customers (see also here and here for more examples of their anti-marketing), and in BillM’s report, it seems positively underhanded to accept a customer, run a credit check on them after claiming you won’t, and then to boot them unilaterally. That’s a recipe for making people unhappy.

Has anyone else been affected by this?

Original photo by John Cohen

One of the things people sometimes say about me is that I’m “anti-bank.” I assume they say this because of posts like this one, where I derided Wachovia’s overdraft policies. So, am I anti-bank?

Nope, I have bank accounts at Washington Mutual and USAA. I own and use several credit cards, including an American Express card. I have an IRA. I don’t own a safe in my home and wouldn’t keep my money there if I did. I think banks provide a great service in holding your money, paying you interest on it in some cases, making it available to you all over the world through ATMs, and making it easy for you to buy and sell goods and services without carrying a pool-shark’s money roll on your person at all times.

I am very strongly opposed, though, to banks and credit cards that manipulate customers into exorbitant fees. Nearly all consumers are paying bank or credit card fees they can eliminate from their accounts — either by using better money management tools (ours or others’), or by doing business with better banks. Such fees have skyrocketed, more than doubling, over the past ten years, and since we are in the business of helping consumers get more for their (and our) money, helping reduce or eliminate those fees is an easy and nearly-universal benefit. Bank where you won’t get hit with fees — that’s my message on banks. I am no more “anti-bank” than a bad restaurant review is “anti-restaurant.”

But, don’t take it from me. I was doing some research today, and in a few minutes’ time I ran across a set of quotes from bankers, analysts, Congressmen, journalists, and others, and thought, wow, these folks are all just as “anti-bank” as I am.

[…T]he potential for fee income associated with checking accounts has grown dramatically. Initially, it was overdraft charges. For decades, the customer who overdrew his account balance received a stern letter from the bank, was tolerated for a while, and eventually was asked to move his account. As banks have raised their overdraft charges from $2 per overdraft to $20 and more, overdrafts have become a major profit center. And with the development of overdraft protection services, marketed aggressively by third-party vendors and developed internally by many banks, the desirability of building a huge base of checking account customers, even low-balance ones, has been heightened dramatically.

In short, checking accounts moved from a necessary evil—when savings and loans first got checking powers many S&Ls chose not to offer them—to the primary vehicle by which dynamic banks are fueling their growth.

Shattered Myths
Bank Director Magazine - 4th Quarter, 2004

1. Penalty fees for NSF and overdrafts are a huge and growing expense for bank customers. Consumers are paying at least $10 billion per year or as much as $22.7 billion just for overdraft loans, according to CRL’s estimates based on analysts’ assumptions and reported checking account service fee revenue. The total cost to consumers of NSF and overdraft fees at all financial institutions in 2003 was $33 billion, according to Mike Moebs of Moebs Services. CFA found that over a fourth of big banks cite overdraft fees as a source of important revenue.

2. The biggest banks charge the highest fees for NSF and overdraft transactions. Banks in the CFA survey charged an average of $28.57 for overdrafts and $28.09 for NSF transactions. Big banks on average charge five percent more than banks in Bankrate.com’s spring 2005 checking account study which also found that bounced check fees jumped five percent in the last six months. Six big banks in CFA’s survey charge more for paying an overdraft than for bouncing a check. Nearly half of the big banks also charge sustained overdraft fees, some as high as $27.50 per incident.

Letter to Alan Greenspan
Consumers Union - June 8, 2005

Data from regulators show that banks, thrifts and credit unions collected a record $37.8 billion in service charges in 2004, more than double what they took in 10 years earlier.

Roughly 45 percent of those fees came from customers overdrawing their accounts, according to an estimate by the Center for Responsible Lending.

Banks follow a simple rule: Charge!
Pittsburgh Post-Gazette - November 06, 2005

Bounced-check fees are among those unusual expenses that many people are willing to pay without putting up much of a fight, said Steve Williams, a principal at consulting-firm Cornerstone Advisors in Scottsdale.

Such acceptance perhaps stems from consumers themselves having triggered the charges because of their own oversight.

“Banks have found segments of the population who just pay up,” he said.

Watchful eye can avoid bank fees, penalties
The Arizona Republic - April 24, 2006

Among the report’s findings:

• Credit card charges in the United States exceed $1 trillion dollars as of 2005, with an estimated 691 million cards issued to American citizens. Total American household debt, including credit card debt, came to $830 billion by the end of 2005.

• Penalty fees for actions such as late payments have more than doubled in the last ten years, from $13 in 1995 to as much as $34 in 2005.

• Card issuers now charge a variety of “hidden” or additional fees, such as charging for payments made over the phone, cash advances, and balance transfers. These fees can range from $10 to $31, depending on the transaction.

• Exceedingly high interest rates — often as much as 30 percent — are charged when customers miss a payment.

Credit Card Fees Rise, Disclosure Statements Inadequate
General Accounting Office (via ConsumerAffairs.com) - October 12, 2006

It is the punitive fees that are taking the biggest bites out of consumers’ wallets.

The average bounced-check fee, often referred to as a nonsufficient-funds fee, or NSF fee, by your financial institution, is now at a record high of $27.40. This is up from $27.04 in the spring edition of the survey. Bounced-check fees were on the move, even more than normal. There were 85 accounts posting increases in the bounced-check fee and just 32 decreases, compared to 39 increases and 19 decreases in the past survey.

ATM surcharges, the fee charged by ATM owners when you don’t have an account with them, hit a record for the third consecutive survey. The average ATM surcharge is now $1.64, up from $1.60 and $1.54 in the spring 2006 and fall 2005 surveys, respectively. The trend toward higher surcharges is unmistakable: Since the last survey, 22 banks boosted these fees, six reduced them.

It’s not only the increased amount of the fee, but the increased frequency with which consumers encounter the fee. Just how prevalent is the practice of ATM surcharges? Of banks owning ATMs, the percentage that assess surcharges is the highest on record — 98.3 percent. To put that in context, the survey found the same percentage of banks, 98.3 percent, provide their account holders with online access to their accounts. So ATM surcharges are as commonplace as online account access during the Internet Age.

Bankrate’s fall ‘06 checking study: Fees rise again
Bankrate.com - October 30, 2006

Bank fees are a powerful source of revenue for America’s financial institutions, and one of consumers’ top headaches. If it feels like the bank fee noose has closed tighter around your neck in recent years, it has. The Federal Deposit Insurance Corp. says the nation’s largest banks now generate 44 percent of their revenues from fees. Estimates of how much that amounts to vary between $30 billion and $50 billion a year, but it’s clear banks are rolling in money they take from customers, often without explaining themselves very well.

How do banks make all this money? Let me count the ways. A $20 withdrawal from the wrong ATM costs an average of $4 in withdrawal fees. An attempt to withdraw $500 from the wrong ATM can result in a rejection and a $1.50 ATM withdrawal fee. Getting close to an empty account? Don’t worry, your bank will automatically provide you with overdraft protection, for $31 an occurrence. BusinessWeek recently told the story of a college student who used a cash card linked to any empty account to purchase seven Christmas gifts for a total of $230, then was hit by $217 in overdraft fees.

Then, there are crazy credit card fees, like the over-limit fee. If you spent a lot on plastic during the holidays and are near your limit, beware: Banks can lower your credit limit, citing a credit risk, and then charge you an over-limit fee.

A QUEST FOR ‘MORE INFO’ ON BANK FEES
MSNBC - January 12, 2007

For the third time in 20 months, Bank of America Corp. has increased the fees it charges customers who overdraw accounts or bounce checks.

The fee for each overdraft or returned item during the first day an account is overdrawn was increased from $19 to $20, and the fee for each overdraft or returned item on subsequent days was set at $35.

The Feb. 16 change eliminated the middle tier in the bank’s overdraft fee structure. Previously, the bank had assessed a $33 fee per overdraft or returned item for the second, third and fourth days an account was in imbalance, and charged a $35 fee for each additional day….

A Bank of America employee, who asked not to be identified because he was not authorized to speak officially about fees, said bank software regulates whether an employee can erase an overdraft charge and grant a rebate to a customer who complains about the charge.

Bank of America again raises fees on overdrafts
The Boston Globe - March 1, 2007

Certainly, there’s a problem with bank and credit card fee revenue, but the problem isn’t me. It’s not anti-bank to want to keep your money — isn’t saving money what banks are supposed to be all about?

Looking for a reason to close all your bank accounts and keep your money in a pillowcase under your bed? Head on over to Bankrate and check out their Fall 2006 Checking Survey. Bankrate collects information on bank fees and surcharges, so reading the report is kind of like looking at the “Nutritional Information” box on a 12-pack of Twinkies. Deep fried!

Like Twinkies, the results aren’t good for your heart. Here’s a good clip from the conclusion:

While more banks are permitting customers to go to another bank’s ATM without charge, those transactions don’t come without a cost. ATM surcharges are higher and more prevalent than ever, and even the “deal” some banks give by allowing free nonbank-ATM withdrawals requires maintaining a large balance in a low-yielding checking account. By settling for average interest earnings of 0.34 percent instead of the 5 percent returns available in a savings or money market account, an account holder forfeits more than $100 per year in interest earnings on a $2,500 balance.

It takes a lot of ATM withdrawals to make up for that, and you’ll still have a hard time avoiding surcharges. Instead, it pays — literally — to manage your ATM withdrawals more proactively. Plan to take money out of only your bank’s ATM, planning ahead so the withdrawal can take place in the normal course of a workday or weekend when you’d otherwise be near your bank’s ATM. This sure beats waiting until you’re really in a pinch for cash, then having to make the withdrawal on another bank’s turf.

There’s lots more to learn in the report, and it’s short (three pages) and informative. Definitely check it out. (I’ve put the main conclusions below. If it’s too depressing, allow yourself a Twinkie for Halloween.)

Yesterday’s New York Times had a good article on security risks from carrying so-called “swipeless” credit cards — credit cards that come with radio transmitters, so you can make a payment just by placing the card near a reader, rather than having to swipe it through a credit card machine:

They call it the “Johnny Carson attack,” for his comic pose as a psychic divining the contents of an envelope.

Tom Heydt-Benjamin tapped an envelope against a black plastic box connected to his computer. Within moments, the screen showed a garbled string of characters that included this: fu/kevine, along with some numbers.

Mr. Heydt-Benjamin then ripped open the envelope. Inside was a credit card, fresh from the issuing bank. The card bore the name of Kevin E. Fu, a computer science professor at the University of Massachusetts, Amherst, who was standing nearby. The card number and expiration date matched those numbers on the screen.

The demonstration revealed potential security and privacy holes in a new generation of credit cards — cards whose data is relayed by radio waves without need of a signature or physical swiping through a machine. Tens of millions of the cards have been issued, and equipment for their use is showing up at a growing number of locations, including CVS pharmacies, McDonald’s restaurants and many movie theaters.

I’m glad to see this research, and to see that people are calling attention to any security problems that exist in these systems now, before the systems become more widespread.

Unintended data loss is really only one of the risks of these systems, though. The whole point of having a swipeless card is to make it easier for you to spend your money quickly and impulsively. That may be a bigger risk! If you can avoid having a radio transmitter in your credit card, it may well be worth asking not to have one, both to protect your privacy, and to make it just a little harder to make those purchases you haven’t really thought through…

ZDNet has a great find today (via The Consumerist) — a patent application from a company that processes rebate submissions. From the patent:

The present invention satisfies a need for a more consumer friendly method for processing rebates that maintains a breakage rate […] the rebate processing system provides a user friendly interface, yet retains hurdles sufficient to maintain breakage.

Breakage refers to any event that prevents a rebate transaction from being completed, for example, denying based on bad verification materials such as receipts or UPC symbols, denying based on improper purchase dates or purchase price, or slippage from checks issued but not cashed.

Original photo by e-magic.

Last year for my bachelor party, my friends got together a fund to get me a Canon camera — the Digital Rebel XT, which has been a fantastic tool. Canon offers a yearly rebate around the holidays, so that if you buy Canon camera bodies or lenses, you get a generous amount back. I filled out the rebate forms and sent them in — because I got a new camera and two lenses, I wound up with a $315 total rebate. I waited the 6-8 weeks the rebate was supposed to take, called them, and was told my rebate submission had been lost. “You kept copies, right?” they asked. Why, yes, I did — since I worked as a paralegal right after college, I’m a little nutty about keeping copies of everything like that. “Oh,” they replied, obviously disappointed. They had me send the copies to a different address and told me to expect a check in another month. A month passed and I got nothing, so I sent a letter to the CEO of the rebate fulfillment house, copying the Canon customer service address, telling them to get me the refund in a week or I’d go to small claims court. A week later, the check showed up.

If you look on DP Review, a popular digital photo site, and search the forums for canon rebate lost, you’ll see that a huge number of other people were also told their rebate submissions had been “lost.” Many of those didn’t keep copies and were out of luck. It makes you wonder who gets paid to lose those submissions so often.

In contrast, when I bought an Intel iMac earlier this year, the Apple Store offered me a $100 rebate on a $100 printer — and then made it incredibly easy to get that rebate. They gave me the rebate form with some information already filled out, and a copy of the receipt stapled to it. When I sent in the rebate, they sent me an email as soon as they’d received it, telling me it was in process. I got the check about four days after that. Total time spent? Maybe 15 minutes. Kudos to Apple for making it so easy.

Rebates can still be a good deal as long as they aren’t an outright scam — $315 back on a ~$1000 purchase, as in the Canon case, is pretty substantial. (I wonder if there’s an inverse correlation between the value of the deal and the “breakage” rate.) But when you evalutate the offer, don’t look at it just for the amount you’ll get back. Think of it this way instead:

rebate value = rebate amount - (hours I'll spend dealing with it * how much my time is worth)

Don’t take a rebate offer without considering what “breakage” is, and what it will mean to you as you try to get your rebate check. Make copies of every rebate you submit, and assume that you’ll have to spend a couple of hours chasing down any rebate. With that in mind, you can evaluate the offer for what it will really get you and really cost you — not just the face value.

Update: I accidentally credited The Consumerist with this find originally — it looks like ZDNet should get the credit. I also updated with quotes from the patent (per the ZDNet article).

I tried to pay my credit card bill on the American Express web site yesterday, and put in 350 for the amount I wanted to pay. Back came this error message:

Yeah, they wouldn’t accept my payment because I’d entered 350 instead of 350.00.

Now, I don’t like to be a big conspiracy theorist nor say that a cabal of cruel credit card cads is looking for ways to drive us all up the wall. (Okay, it does actually feel good to say that. But I like to give people the benefit of the doubt, even credit card companies.) I can’t help but wonder, though, how many times a day this error happens on the American Express web site. Hundreds? Thousands? I know that I personally hit it basically every time I pay my bill. Is it really possible that they just have no idea how aggrevating their site is? Note, by the way, that they’re more than happy to ignore a comma in a bill payment — 1,234.56 is just as acceptable as 1234.56. Are they willing to make things easy when you’re paying thousands of dollars, but not when you’re paying cents? (I love the example text that suggests paying 345,678.00. Thanks, next time I have a third of a milllion dollars in Amex debt, I’ll remember that!)

I won’t speculate about why they allow this aggrevation to happen every day, and whether it is intentional or not. I’ll just say that credit card companies in general make a very significant portion of their revenue — up to one-third — from “fee revenue,” which is the money you pay them not including interest (things like late fees, overlimit fees, and so on). American Express in particular would make more money from me this month if I’d gotten so aggrevated with their annoying web site yesterday that I walked away, and forgot to come back until after the due date. So I didn’t.

People who study user experience — for instance, our friends at Adaptive Path — can teach companies how to value a great user experience. It’s unfortunate that the math is somewhat inverted, here: American Express has an economic incentive to make their web site usable (since web payment is far cheaper for them than getting checks in the mail), but not too usable. The best situation for them is if you pay your bill through the web, late. Using Adaptive Path’s formulation: “To achieve increased fee revenue, we can make our payment site available but aggrevating by making the customer pat their head and rub their belly at the same time.” Great.

I think, next month, I’ll send American Express a check, on time. Hey, Amex, fix your site! I’d love to pay you more easily.

(Matt Haughey has another great example of how annoying the American Express site is, from last year. Update: my friend Nelson has yet another good example from a few years ago, as well.)