Regardless of what their catchy jingles say, banks are not on your side. They are businesses that have one purpose: to generate as many profits as legally possible. This is something they happen to be spectacularly good at, as the top five largest and most profitable public companies in the world are all banks.
This creates a conflict of interest. You want to keep as much of your hard-earned cash as possible and so do the banks you trust with your money. It’s no surprise then that banks sometimes drift from the fine line of what is legally and ethically acceptable and start shafting their customers.
Related article: 10 Ways to Tell If Your Credit Card Sucks
Here are 15 ways your bank is ripping you off. You may not always be able to do much about it, but, hey, at least you’ll know it’s happening.
1. By getting you to buy things you can’t use
Bank call-center operators are paid to sell financial products, so you expect them to be a little pushy. Everyone has to make a living, right? Sometimes they get a little carried away and sell services to people who don’t qualify for the benefits the services offer.
For example, on July 18, 2012, Capital One was fined $210 million in refunds and fines for selling payment protection insurance that would cancel credit card debt when customers lost their job or became sick. The catch was that some of the clients purchasing the purchase protection were already sick or unemployed and would therefore never qualify to collect a claim.
2. By jacking up fees without improving service
We’re all used to a little inflation. Who hasn’t heard Grandpa go on about what he could buy with a dollar back in the day? A dollar in 1950 had the purchasing power of $10 today. And that’s okay. According to some economists, a little inflation is actually good for the economy. Banks are in a league of their own when it comes to increasing prices.
According to a survey by Bankrate.com, from 2007 to 2012, the average cost of a bank account’s monthly service fee spiked by 142%, the average ATM surcharge jumped by 40%, and the average overdraft charge increased by 11%. Fortunately, banks rewarded customers by offering them great service and displaying exemplary fiscal responsibility during the 2007 and 2012 period.
3. By targeting the financially challenged among us
People with lower credit scores and lower credit limits will generally have less cash on hand to deal with emergencies and are more likely to start incurring in late fees and penalty rates. They are also more likely to buy financial products by mistake. Banks know this, which is why they target this demographic particularly hard when selling financial products.
In 2012, the Consumer Financial Protection Bureau (CFPB) fined Capital One $25 million for targeting people with subprime cards and lower credit limits. The CFPB’s investigation of Capital One’s marketing tactics showed that customers who called in to activate their new credit cards generally had a 2-minute waiting period. Yet, customers with subprime cards and lower card limits had to deal with eight-minute sale pitches from live operators while waiting for their card to be activated. What’s worse, Capital One operators sometimes told customers that services like credit monitoring and payment protection were mandatory.
4. By not reporting to the credit bureaus
Banks are not legally required to report all your account activity to the credit bureaus, but they are required to report customer disputes. They’re also required to report payments to the credit bureaus when they promise their clients they will do so. Unfortunately, that doesn’t always happen.
On October 1, 2012, American Express® was fined $112.5 million by the CFPB for not reporting customer complaints and disputes to the credit bureaus. American Express® also deceived its clients into believing their credit score would improve if they paid old debts. The truth was American Express® was not reporting the payments; and even if they had, the debts were so old they didn’t appear on their credit reports or affect their credit scores.
5. By not paying up the rewards they promise
One of the best things about using credit cards is you can get free money just by using them. That is unless banks don’t keep their promises.
American Express®’s Blue Sky credit card promised new customers $300 and additional bonus points if they signed up for the American Express® Centurion Bank program. When it came to paying up, Blue Sky shafted its customers and defaulted on the $300 sign-up bonus. Don’t worry though. In 2012, the Consumer Financial Protection Bureau ordered American Express® to honor its promises and give customers their $300. It must be nice being a multi-billion dollar financial institution. You get caught stealing from your customers and all you get is a slap on the hand and an order to give them their cash back.
6. By charging outrageous overdraft fees
We are all responsible for making sure we don’t spend more money than we have. Banks should be able to charge an overdraft fee if an account is overdrawn. However, the overdraft fees many banks charge their most vulnerable clients are so outrageous they would be illegal if they were marketed as what they really are: usurious interest rates on short-term loans.
According to a 2008 study by the FDIC, customers pay $17.5 billion a year on automatic overdraft loans worth only $15.8 billion a year. No that wasn’t a typo. Banks are charging over 100% APR on what amounts to a short-term loan. It’s no surprise overdraft and insufficient funds fees amount to 61% of the revenue banks make on checking accounts.
Our article 6 Tips to Save On Banking Costs offers ways to avoid all those pesky fees.
BB&T are the worst we’ve seen at this ploy. They charge a $36 overdraft fee for every item charged to your account (up to a maximum of 6 items) and a $36 fee for every returned item. They get paid whether they accept the transaction or bounce it. Not only that, if your account is overdraft for five consecutive business days, they start charging a daily $36 extended overdraft fee. You could overdraft your account by $6 with six $1 items and pay $216 in fees.
7. By charging unlawful late fees
If you’re late with your monthly credit card payment, even if it’s only by a day, banks charge you a fee. This is annoying but legal. The Credit CARD Act allows banks to charge customers with a penalty fee of $25 or less. If the customer already was late within the last six payments, the bank can charge up to $35. However, the penalty fee cannot be greater than the minimum payment. If your minimum payment is $20, the maximum late fee is also $20. The Credit CARD Act was passed in 2010, but some banks seem to have not got the memo.
In 2012, American Express® Centurion Bank and American Express® Bank, FSB were busted by the CFPB for billing customers with late fees based on a percentage of their debt, which violates the Credit CARD Act (source).
8. By manipulating interest rates
Knowledge is money. If you knew how the stock market behaved just a few seconds before everybody else, you would soon be the richest man on the planet. Now imagine what you could do if you decided how the stock market would behave. That is effectively what banks have been doing with interest rates since at least 1991. This surfaced in 2012 as the Libor rate-fixing scandal, which cost consumers billions of dollars.
Put simply, Libor is a benchmark interest rate that is derived from the average interest rate banks charge each other to borrow money. The Libor rate is used as a reference rate for trillions of dollars in derivatives, a market controlled by large banks, as well as for mortgages and student loans. Even small changes in the Libor rate can generate millions of dollars in profits or losses. Traders from major banks like Barclays, Royal Bank of Scotland, and UBS, made a killing by submitting fraudulent rate submissions, which allowed them to manipulate the Libor rate to their whim.
9. By charging you for making money with your savings
Maintenance fee charges on bank accounts are like cigarettes. If someone came up with a product like tobacco today, there’s no way it would be legal. But it’s part of the culture and it’s been around for hundreds of years so we switch off our collective frontal cortex and agree to pay banks maintenance fees for the privilege of allowing them to make money from investing our hard-earned cash.
What’s even more insane is that there’s no cap on monthly maintenance fees. Regulators had no problem capping debit card charges but forgot to do anything about the charges that actually hurt us. Citizens Bank charges customers $50 a month, Sovereign Bank has a $30 fee, and Bank of America imposes a $25 a month. They could all agree to charge $1,000 and there is little you and I could do, except choosing to stuff our cash in mattresses and giving up on checks and credit cards.
10. By imposing a minimum balance fee
Sure, you can often avoid maintenance fees by keeping a minimum balance in your account, but for people who live paycheck to paycheck, it’s a tax. Even if you do have the money, being forced to have hundreds of dollars – $6,000 in the case of Citibank’s EZ Checking account – sitting pretty in a bank account that makes has a measly 0.06% interest rate (the average annual percentage interest on savings accounts in 2013) is a rip-off.
By now, you’d be surprised if not all banks were terrible. Check out America’s Best and Worst Banks for some standouts.
11. By playing dumb when you’re hit with fraudulent charges
Not content with running their own swindles, some banks go further and help criminals defraud their customers out of millions of dollars by looking the other way when they see suspicious transactions.
According to a 2013 report by the New York Times, the First Bank of Delaware was forced into a $15 million settlement with the Justice Department for allowing merchants to debit accounts illegally more than two million times and steal over $100 million. First Bank profited handsomely from ignoring blatant telltales of potential fraud by collecting processing and overdraft fees from victims.
12. By taking five days to wire a transfer
Wire transfers may very well be the biggest banking scam you’ve never heard about. Forty years ago, it would take five business days to send a wire transfer from one account to another. Now we have clever things like email and the internet and it still takes 3 to 5 business days to wire money between banks. Why? Because American banks have chosen to keep a slow and archaic system that still works off COBOL, a programming language so ancient there aren’t many programmers under retirement age that know how to program in it.
This allows banks to charge outrageous fees and invest your money for a week without paying interest. Sending a wire transfer can cost between $25 and $50 and some banks will even charge you for receiving a transfer. Add to that the aggregate of all the cents in unpaid interest that banks make on every wire transfer and you got yourself the recipe for a good old rip-off.
Incidentally, the UK also used to work off an archaic wire transfer system, but consumers complained so much the banking industry was forced to switch it for a new one. It is called the Faster Payments Service and allows Brits to send money instantly, any day of the year, including Christmas.
13. By inflating ATM fees
The real cost to banks per ATM transaction is around 36 cents. Yet, the average out-of-network ATM fee is $2.45 and continues to rise, which explains why banks, in 2007, made $4.4 billion in ATM fees alone (source). There was a federal amendment bouncing around Congress in 2010 that proposed capping ATMs at 50 cents, but – shocker alert – it failed.
14. By selling payday loans
You probably already know that payday loans are short-term loans with extortionate fees and interest rates that easily rack up the equivalent of a 300% to 500% APR. What you probably don’t know is that many “reputable” banks also run these scams, and we’re not talking small-town banks either. Big names in banking, such as Wells Fargo and Fifth Third also sell them, they just call them by another name: bank deposit advance loans.
Don’t let the different name fool you, advance loans are every bit as predatory as payday loans. Both payday loans and advance loans are for small amounts of up to $500. Both are secured by the client’s next paycheck, and both have fees of up to $100 per pay period. This 2013 report by the Pew Charitable Trusts sets out the close similarities between payday loans and advance loans.
15. By charging made-up fees
It was bad enough when banks just charged high fees for investing your money (maintenance fee) and for letting you spend your money (ATM fees). Now they’re getting creative and charging fees on “services” that used to be free.
U.S. Bank charges a $2 paper statement fee; Wells Fargo makes you pay a $24 processing fee for using your credit card reward points; the Bank of Oklahoma charges a $15 returned mail fee, and the Sovereign Bank charges customers a $15 when a check deposited in their account bounces. Talk about adding insult to injury. My favorite bogus fee is Bank of America’s self-explanatory, but no less outrageous $8.95 human-teller fee.
Bonus rip-off: by delaying the cancellation of private mortgage insurance
Private mortgage insurance (PMI) protects lenders from the financial loss they suffer when borrowers default on their mortgage payments. It also allows borrowers who don’t have enough savings for a 20% down payment to get approved for loans and interest rates they would otherwise not qualify for.
However, PMIs are expensive and no longer necessary once a homeowner has built some equity, which is why federal law allows borrowers to request a cancellation of their PMI on the date their mortgage is scheduled to drop to 80% of the original value of the property. Just avoiding a few months of PMI payments can save you hundreds of dollars, which explains why many banks are so slow at processing their clients PMI cancellation requests.
The CFPB recently found that banks who service mortgages often use delay tactics when handling PMI cancellation applications because premiums paid before a PMI is canceled are not refundable.
Banks aren’t all bad, but stay skeptical
We’re not saying that all banks are bad or that they don’t provide a valuable service to society. Savings accounts, auto loans, mortgages and credit cards are powerful tools when used wisely. However, it’s important to remain skeptical and always remember that banks are businesses that offer valuable services because they turn out a tidy profit, not for philanthropic reasons. Keep that in mind and you’ll have a fighting chance of keeping hold of your savings and even generating a little interest of your own.