A nasty twist on personal banking

02/27/05

A trace of the old company store is making a comeback in the United States. It’s called your neighborhood bank.

Company stores kept many Americans in a perpetual state of debt by letting employees run a tab when they bought anything from food to farm equipment. By the time payday rolled around, most employees had next to nothing left and their debt mounted.

Banks, you might be thinking, are places people go to save money. But let me tell you a story.

Our daughter Meghan has her first bank account at the Lexington branch of Citizens Bank, an institution that prides itself for its access (branches in supermarkets) and its friendly service. Like many other banks today, however, Citizens Bank has at least one service that’s anything but friendly. Its cash machines will let you draw money even if it puts your account in the red -- and then slap you with a substantial fine for overdrawing. A manager there told me that this is so customers don’t get caught on the road without a dime or a way to get home. It’s also, he conceded, a way to make money.

Specifically, for each $20 a customer overdraws an account – that’s the maximum amount an ATM spits out if the account goes in the red – customers are charged for an overdraft. They aren’t told this in advance. It just happens.

So in the last month, Meghan has been charged about $70; that’s 8 percent of her take-home pay. It also is at interest rates that can only be called usurious. Last week, for example, Meghan was charged $29 for overdrawing her account by $56. We haven’t figured out yet how she overdrew that much. We can figure out, however, that though her account was in the red for less than a week the interest on the error was more than 50 percent of the overdraft. Since this was the third such charge to her account this month – again, each overdraft draws its own penalty – we talked to the bank. Only then did we discover (a) that the bank makes it plenty easy to overdraw your account from a cash machine and (b) that it charges exorbitant penalties each time you do it (earlier charges were $25 so it may just have gone up).

I know that this policy has become commonplace at least in New England because my local paper, The Boston Globe, wrote about it on the front page. So Meg isn’t changing banks; as I said, it’s a friendly place. Instead, she discovered a safeguard no one was advertising. All customers has to do is request that they not to be allowed to overdraw their account without warning – to turn down the dubious privilege of rapidly putting themselves into debt at the corner ATM.

The bank officer first offered Meghan an alternate. For $20 a year she could instead pay for overdraft protection – with any outstanding balance paid back at an interest rate of 18 percent a year. That’s a much lower interest rate, mind you, than the instantaneous fines slapped on for overdrawing an account. But compared to the bank's standard interest rates paid to customers for savings –less than one and a half percent – it’s still an awful lot to pay the company for a cup of sugar.