It’s rare to read a genuinely good personal-finance story, so I was glad to see Karen Blumenthal’s column in The Wall Street Journal today take a hard look at how banks aid scam artists.
Blumenthal’s relative was getting involved with those telemarketer scam artists that prey on the elderly. He ended up sending money to scammers and overdrawing his account numerous times. For the privilege he was charged $33 a whack. The column points out that “overdraft protection” allowed the scammers to get more money from the relative.
I like this piece because it has an urgency you too often don’t find in personal-finance journalism. Perhaps because the author’s own family took the hits, Blumenthal is pretty blunt about what’s going on here. And the headline doesn’t hem and haw, either, saying “How Banks, Marketers Aid Scams.”
And look at this (emphasis mine):
What the son didn’t count on was that the bank would automatically cover up to several hundred dollars a month of his father’s overdrafts, which essentially gave him more money to send to scammers. In addition, he was charged $33 for every overdraft—running up hundreds of dollars in fees. When the son called Sovereign Bank, his father’s longtime bank, he was told that the protection was standard and that he couldn’t turn it off.
Those hundreds of dollars in fees are exactly why the Orwellian “overdraft protection” is there in the first place. It doesn’t protect you from overdrafts, it allows you to overdraft. It’s essentially an unregulated high-interest, short-term loan from a bank to a depositor.
Here’s the weaselly response from the bank:
Steven Mantelli, Sovereign’s senior vice president for retail banking, says the bank provides overdraft protection “on a courtesy basis” for customers, and it isn’t typically shut off. But in isolated situations, he says, the bank will stop it.
“Isolated situations” like when a customer has the biggest financial newspaper in the world on the phone on their behalf.
I have a quibble with this paragraph:
Just a few years ago, banks simply declined to cover overdrafts. But a Federal Deposit Insurance Corp. study of 462 banks last year found that three-quarters of the banks now automatically enroll customers in overdraft programs and that overdraft charges generated about $2 billion in bank fees in 2006, or about 6% of the banks’ operating revenue.
Somebody who’s not reading closely could come away with the idea that the whole industry only came away with $2 billion from overdraft fees in 2006. There are better statistics out there. The Washington Post this weekend in an excellent personal-finance story (keep ‘em coming!) reported that the industry will rake in $37.5 billion from overdraft fees this year. That comes out to about $125 for every man, woman, and child in the country, which seems like a stretch to me, but I’m through being surprised by the banks doings.
And the Post has a good anecdote that shows how that $37.5 billion “overdraft protection” number may be plausible (my scare quotes are intentional—the Post should not have called this protection without quotes, even if it is sarcasm):
Since May, Lori Harris, a Laurel resident, has been the inadvertent recipient of such protection.
Early last month, she deposited money into her Bank of America checking account, but the check did not clear before several charges were posted.
Each time Harris overdrew her account, she paid $35, totaling nearly $300 in fees in May. That set off a chain of events that has left her with about $600 in overdraft fees this month.
Ever had that happen to you? I have, back in college and in my early days in New York as a poorly paid reporter. The “overdraft-protection” scam is particularly brutal on folks who live paycheck to paycheck, or like me back in college: Stafford Loan to Stafford Loan.
Blumenthal broadens her piece to look at companies who sell direct-marketing lists to scammers.
Another eye-opener was how quickly our relative’s phone calls and mail increased once he began replying to sweepstakes and lottery offers. Law-enforcement officials say his response likely landed him on so-called sucker lists that were repeatedly sold.
The lists Blumenthal finds might as well be labeled “marks” or “scam these people!” (emphasis mine):
NextMark Inc. of Hanover, N.H., offers an online database of mailing lists, and a quick search yielded dozens of mailing lists of sweepstakes players, including the “Lucky Sweeps and Lottery Players” list, described as “an ideal audience for business opportunity, subprime credit offers, online betting services, travel and more!” and the “Consumer Centric Sweepstakes Players,” another list of players who “are very responsive and thrive on winning.”