Why Are NSF Fees So High?

No business can stay in business if it cannot make a profit. If you started a business, would you continue to provide your service or products if you had to pay the expenses of the business from your own pocket? Of course not! So, when we discuss banking, we need to understand first that banks are businesses, and the purpose of a business is to make a profit.

The service that banks provide is to keep your money safe while it is in their care. Checking and savings accounts are known in banking as DDA’s, Demand Deposit Accounts. This means that when you put money into your account, you have the right to get it out of the account. But, understand, you can only get out what you put in.

Electronic banking (debit cards and ACH transations) greatly increased the opportunities for NSF fees, because people became used to using the “float”, or “kiting” checks. Under the old, manual system of banking, the float might be as much as 7 – 10 days for out of town checks. If a check was mailed to pay a bill, it took 2 – 3 days for the payment to arrive. Then, the business had to deposit the check into their account at their bank, which meant that it was probably deposited the next day after it arrived. Then, if your account was with a different bank, your check had to be sent to your bank, and it was probably deducted the next day. So, it was easily possible to have 3 – 5 days before the check was paid out of your account. Most people knew this, and they counted on the timing so they could wait a couple of days before depositing money into their account.

However, bankers made a strong argument to Congress that the check should be counted as a previous day transaction because it was processed by the recipient a day or more before it was deducted from the payor’s account. This resulted in the Federal law known as Check 21. It gave banks the right to process checks which had been presented for payment on a prior day as prior day transactions FIRST, before processing deposits and checks presented on the day of processing. This greatly increased the possibility of NSF fees for people who counted on the “float”.

Remember, checking and savings accounts are demand DEPOSIT accounts. No customer is entitled to use funds they haven’t deposited before the transaction. Until we understand and accept this, we cannot get the point of why NSF fees have become a major source of profit for banks.

Electronic banking greatly increased the possibilities for overdrafts when transactions are completed before deposits. Debit card transactions used to be a huge source of profit for banks until the Federal Law made it illegal for banks to charge overdraft fees for debit card transactions unless the customer opts out of that protection. ACH transactions are direct electronic deductions from a checking account. Pre-authorized monthly transactions are usually ACH debits. If you forget that you authorized a payment, and the money isn’t there, here comes the NSF fees.

Now, why are NSF fees so high? There are a couple of reasons why they are in the category of price gouging. First, courts and government refuse to outlaw NSF fees. Why? I don’t know. Therefore, it appears that banks feel they have immunity for these fees, and they keep raising them higher and higher. Second, banking regulations by the government have taken away many traditional sources of profit for banks, so they increase NSF fees to increase their income.

What can you do to prevent NSF fees from being assessed on your account. It is a very simple principle. Never write a check, authorize a debit or use your debit card unless the money is already in your account. This system works every time.

It is unfortunate that people who are least informed and disciplined in managing their accounts are the ones who provide much of the income for banks.

By the way, let me remind you how your debit card transaction can cause NSF fees. Banks process transactions at the end of the day in this order: prior day credits, prior day debits; same day credits, same day debits. And, they process largest transactions first, then in descending order largest to smallest. So, if you make a debit card purchase in the evening for $100, and a check for $75 is presented for payment tomorrow, the debit card transaction will be paid first. Suppose your balance is $78.. enough to cover the check. But, the debit card transaction is processed first, overdrafting your account. Of course, the debit card overdraft cannot be charged an NSF fee. BUT, the check for $75 will further overdraft your account and WILL result in an overdraft fee! Ouch!

Now, suppose that on this same day there are checks for $55, $32, $25, $19 and $5.00 also presented for payment. This will result in 6 NSF fees. Most banks have a policy of a maximum of 6 NSF fees per banking day. So very kind of them. If your bank charges $35 per overdraft transactions, 6 NSF fees totals $210 you will be charged. You have to deposit that amount into your account, plus enough money to cover the negative balance of your account. If you don’t do that within 90 days, most banks will close your account and send the entire amount to a collection agency.

Would you like to have an active part in reducing the income of banks? You can!!! Simply follow the principle: If the money isn’t already in your account, don’t spend it. Responsible money management on your part reduces your contribution to the profit of your bank. Be happy!

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