Bit By “The Shell Game”

Yup. This week I got hammered by what The Wall Street Journal calls The Shell Game. (This is a Money Matters podcast.)

The Shell Game has become better and better known, and is fairly well documented on the Web. But if you’re like I was, maybe you’ve never heard of it.

In case you don’t have time to watch the podcast, let me give you an example (one I’ve plagiarized but also updated from a petition letter (supposedly) sent to the Federal Reserve, apparently dated about 2004. You can read the original example, based on the 5/3 Bank fiasco, [here]:

Day 1:

• You have a balance in your checkbook of $100.
• Stop at store, use Debit card, spend $60.
• Stop for gas, use Debit card, spend $10
• Have lunch use Debit, spend $15
• Stop at ATM for cash for the kids tomorrow and get $10
• Quiz: What is the balance? Answer: $5

Then that evening your partner tells you he had to stop for gas and used the Debit card to fill up the SUV on his way home from work. Subtract another $45.

• What’s the balance now? -$40.
• To confirm you run to the computer and check online. Sure enough, there are all your transactions, shown as “pending”, in order: $60, $10, $15, $10, $45. Available balance: -$40.

Now the account is over drawn. The bank let your partner overdraw the account hours after you were already home. Your Debit transactions were already on record at the bank! You just saw them, in presentation order!

DAY 2:

Adding in the $36 you know you’re going to have to pay for the transaction that overdrew the account, according to your trusty check book program, your balance should now be -$76. (-$40 + -$36 = -$76).

Leaving early to run errands, you go to the bank and make a deposit of $200, giving you a positive balance of $124, right?

Wrong!

During the night, while you were snug in your bed, the bank played games with your transactions; using what Net Banker’s Jim Bruene calls “creative engineering of transaction-processing algorithms.”

Basically, rather than processing your transactions them “as presented” ($60, $10, $15, $10, $45), the bank reordered them, largest to smallest, producing the “actual” (as the bank calls it) ledger balance as shown:

• $60 — $40
• $45 — -$5
• $15 — -$20
• $10 — -$30
• $10 — -$40

(Remember, you started out with $100 in the account.)

By reordering your transactions, the bank made it possible to charge you not one $36 overdraft fee, but four!

But you only know what you saw after the bank closed last night. So, when your partner asks you how much money is in the account as you start Day 2, you tell him $124, thinking (legitimately) that the balance shown by your checkbook program should still match the bank’s balance of the night before (after all, all the transactions were there, in order).

In (bank) reality, by re-arranging your transactions, they are now able to charge you four overdraft fees totaling $144, not the $36 you entered into your register. So at the bank, you start Day 2 with only $16 in the account! (-$40 + $200 – $144 = $16)

This is The Shell Game.

According to a USA Today article published a little over a year ago, ten of the nations largest banks play this game. They are, according to the article: “Citigroup (C), Bank of America (BAC), Chase (JPM), Wachovia (WB), Wells Fargo (WFC), HSBC (HBC), U.S. Bank (USB) and SunTrust (STI).”

Not only that, many of these banks also process charges to your account before electronic deposits. In other words, all items presented for payment will be paid, largest to smallest as per The Shell Game rules, so that any potential overdraft charges can be collected, and then the electronic deposit will be credited to the account. A check deposited at the ATM or at the teller window will, on the other hand, will be credited to the account before items presented for payment are processed, unless there is a legitimate reason to put the check on “hold”.

According to the same USA Today article, “[overdraft] fees make up 90% of service charges on deposit accounts, and they’re expected to yield a record $53.1 billion for financial institutions this year, research firm Moebs Services says.”

But let’s press on with Day 2, shall we? We’re barely past breakfast.

As your partner leaves, he tells you its time to have some work done on the car for your upcoming trip, but the total won’t exceed the money in the account. So that day he:

• Goes by the tire shop and gets the 5,000 mile rotation done — $10
• Has the oil changed — $20
• Stops by the ATM on the way to work and makes a withdrawal — $60
• Total withdrawals: $90

At the end of the day he brings you all the receipts and you type them into your checkbook program, which dutifully tells you the balance is now a comfortable $34 to the positive. Minor hit yesterday. All is now back to normal.

At the bank, however, they claim you have a negative balance of -$74. And they’re not finished yet.

In the middle of the night they again play The Shell Game, processing the day’s transactions in highest to lowest order. Beginning with the -$40 from the previous day, the bank “creatively processes” your transactions thusly:

• -$40 (carried forward)
• $200 — $160 (deposit)
• $60 — $100
• $36 — $64 (overdraft charge from yesterday)
• $36 — $28 (overdraft charge from yesterday)
• $36 — -$8 (overdraft charge from yesterday)
• $36 — -$44 (overdraft charge from yesterday)
• $20 — -$64
• $10 — -$74

DAY 3

Today is Saturday. Your partner got cash yesterday, so you don’t use the account.

DAY 4

Sunday, stay home and play with the kids.

DAY 5

Your checkbook program still think there’s $34 in the account. But the bank isn’t through taking your money. By their records, your account has ended each of the last five days overdrawn. Therefore, in addition to the additional two overdraft charges they’ve managed to tally up with Friday’s creative processing, they’ve also managed to entitle themselves to more of your money in the form of fees. So at midnight they took:

• -$74 (Balance carried forward from above)
• $36 — -$110 (Overdraft charge from Friday’s transactions)
• $36 — -$146 (Overdraft charge from Friday’s transactions)
• $3 — -$149 (Analysis service fee)
• $7 — -$156 (Negative balance fee)

So while you think you have a positive balance of $34, you are really in the hole -$156! And note those last two “fees”. In the last few years banks have gone fee crazy. In an article entitled “Banks: `Protection’ Racket?” Business Week reported that:

“At San Francisco’s Wells Fargo & Co. (WFC ), the fee schedule for California is 55 pages long. The charges include a $2 hit every time a customer with a low balance calls a service rep, $20 for closing an account within six months of opening it, and $30 per hour when a staffer helps a customer reconcile an account.”

So in addition to ripping you off for $180 in overdraft charges you really shouldn’t have had to pay (remember, the first one, where your partner got that $45 dollars in gas, was a quasi legitimate boo-boo), now they’ve figure out how to take another $10 in “fees” — and we’re not done yet!

DAY 6

You don’t use the account. But at the bank they’ve charged you another $7 “negative balance fee”, making your balance -$163.

DAY 7

Another “negative balance fee” is taken, making your balance -$170, and a letter finally arrives from the bank explaining that “as a courtesy” 6 transactions were paid against “non sufficient funds”, and that as a result the bank has charged you $216 in overdraft fees. So you’re belatedly informed — albeit $200 and and a week too late to do anything about it!

And it all started with that $45 tank of gas that the bank deliberately let your partner buy “as a courtesy.”

What’s Going On Here?

Well, obviously banks have found a new cash cow that, as The Consumer’s Union, The Consumer Federation of America, National Consumer Law Center, the U.S. Public Interest Research Group, and the Center For Responsible Lending all point out in a 2005 joint letter to (then) Federal Reserve Chairman Allen Greenspan (among other recipients) is causing problems:

Consumers are losing control of their bank accounts through the convergence of electronic check processing, implementation of Check 21, bank overdraft practices, and delay in making deposits available to cover withdrawals. Consumer complaints and loss of confidence in banks will only grow if these practices are not corrected. The at-risk bank customers include low-balance accountholders who can least afford penalty overdraft fees. A fraction of bank customers are paying the bulk of NSF and overdraft fees. Unless corrected, we believe that some of these consumers will lose their bank accounts and rejoin the unbanked population.

Note the next to the last sentence: “A fraction of bank customers are paying the bulk of NSF and overdraft fees.” In other words, the banks are feeding like vampires off of those at the highest risk: Low income citizens working low or minimum wage jobs. In that, they and the “payday loan” sharks have something in common. Back to the News Week article:

Critics . . . contend that bounce-protection fees, as high as $37 per transaction, are little more than high-priced credit. “If a bank lends you $100 and charges you a $20 fee — and then you pay the money back in two weeks — that’s an annualized interest rate of 520%,” notes Jean Ann Fox, director for consumer protection at the Consumer Federation of America in Washington. “It’s worse than a payday loan.”

The Federal Reserve disagreed, concluding that overdraft fees were not a loan and thus not subject to Truth in Lending disclosure practices. Which is why, since 2005, very little has been done to cut off the banks vampiric overdraft fangs. (The one exception being, banks can no longer show you an account balance at an ATM that includes the amount you’re allowed to overdraw your account. They must show the actual amount in the account.)

But now, hope might finally be on the way. As of last June (2007):

Two major studies are being conducted to examine bank bounced check practices — one by the Federal Deposit Insurance Corporation and one by the General Accountability Office, Congress’ investigative arm. Federal legislation introduced by Rep. Carolyn Maloney, D-N.Y., would bar many current bank overdraft practices. And a congressional hearing is planned for later this summer to highlight abuses of the practice.

This according to MSNBC’s Red Tape Chronicles journalist Bob Sullivan. We’re now in an election year. I hope you’ll take the time to contact your elected representatives in support of congresswoman Maloney’s bill.

But perhaps what galls me the most is the prevailing attitude by not only banks, but other people in the financial industry as well. The idea that “chronic NSF/overdraft customers,” as Jim Bruene put it, are a credit risk. Bruene goes so far as to suggest that those customers should be put: “into an account with a prepaid model that does not allow them to go over the amount in their account. Access can be by debit card and good-funds bill pay, but regular paper-check access would not be allowed.”

Now, excuse me, but whose shown more ability to repay: People with overdraft protection who have months to pay back their loans at regular interest rates, or people who have to pay back (as in our example above) almost $200 in unbudgeted charges in less than two weeks at 520% (annualized) interest?

But then, if the banking industry had to recognize the credit worthiness of people able to pay back those kinds of horrendous fees again and again, and offer them legitimate overdraft protection at regular rates, they’d be slaughtering their herd of cash cows, wouldn’t they?

Never happen!