How the Sneaky Hands of the Big Banks Are Working Overtime to Rip You off

After living through the Great Financial Crash of 2008, just about everybody recognizes that megabanks screwed the economy hard and were rewarded with big bailouts, which further screwed over, well, everybody, in the name of banker bonuses. But Big Finance has been waging its war on the middle class for decades, and many of its most destructive practices don't actually put the financial system in jeopardy. These tactics work because they are so effectively predatory. Banks gouge consumers and get rich—they don't create risks for the financial system, because they result in pure, risk-free profit, converting hard-earned middle-class wages into quick and easy bonuses.

One of the most pernicious of these predatory practices is the overdraft fee. It's one of the biggest revenue streams for banking behemoths today. In 2009, banks reaped over $38 billion in overdraft fees from their own customers, while posting a total combined profit of just $12.5 billion. Without overdrafts, many banks would have scored massive losses last year, and possibly gone under. Instead, they booked epic bonuses.

It can come as a huge shock to get hit with a rash of overdraft fees. You open a bank statement to find that you are not only broke, but deep in the hole thanks to several $30 or $40 charges. Your first reaction is shame. How could I have let this happen? But looking into the ways that banks conduct their overdrafts, you come to realize that you've simply been scammed.

"It abuses consumers and sucks money out of the economy that goes beyond any contribution to society that finance provides," says Rep. Brad Miller, D-N.C. "Overdraft fees are one of the worst abuses. For people living paycheck to paycheck, they have a serious effect on their everyday lives."

Banks are actively deceiving their own customers. According to an FDIC study, 75 percent of all banks don't even tell people they've been automatically enrolled in "overdraft protection" programs. Many consumers don't even realize that their accounts are subject to these charges—they assume that anything that puts them past zero will simply be denied.

It gets much worse. Once banks realized that overdraft fees could be a real cash cow, they developed "fee-harvesting" software, which reorganizes the order of your checking transactions to maximize the number of overdraft fees for the bank. In other lines of financial business, this is called "backdating," and it's considered "fraud."

How the Scam Works

Say you've got $80 in your checking account, and you decide to pay some bills and run some errands. You spend $30 on gas and another $20 on your water bill. Later, you head to the grocery store and spend $81—oops!—on groceries. Banks, of course, could notify you that your $81 purchase was going to send you over the edge and result in an overdraft fee. They don't, because they don't want to risk that you'll deny the purchase and reject the fee.

But in addition to neglecting this safeguard, the bank automatically processes your $81 purchase ahead of your previous charges. As a result, you do not get hit with one unwanted overdraft fee for your groceries—you get hit with three, because your costliest purchase was processed before the others—even though you made the cheaper purchases first.

"Overdrafts are a classic example of a potentially useful idea where the industry ends up going totally overboard," says Raj Date, a former Deutsche Bank executive who currently heads the Cambridge Winter Center for Financial Institutions Policy. "When you step back and ask, as a reasonable business person, would any customer want their fees to be itemized such that their fees would be maximized? No. No customer would ever want it."