Adventures with “free” checking, transatlantic edition

By Felix Salmon
July 1, 2013

[Warning: this post starts off with a long and self-indulgent complaint about my bank. Feel free to scroll down to the bit where I actually get to the point.]

On March 11 of this year, I borrowed $200 from Citibank. Four days later, on March 15, Thomson Reuters was kind enough to directly deposit a substantial paycheck into my account — one which was much, much larger than $200. And ever since then, I’ve been steadily paying back Citibank the money they so kindly lent me, at an interest rate of 13.25%. On April 25, I paid $11.52. On May 23, I paid $12.15. And on June 26, I paid $12.23. At this rate, I am informed on page 5 of my most recent statement, I will pay off the balance in about 18 months.

Citibank, I hasten to add, is doing me a favor here: the standard interest rate on this kind of loan is significantly higher than what I’m paying, at 18.25%. Still, my behavior doesn’t make a huge amount of sense. I have many thousands of dollars in the bank, earning an interest rate of basically zero. In fact, I had many thousands of dollars in the bank on March 11, when I borrowed that two hundred bucks. So, what was I thinking? Why did I borrow the money in the first place, and why have I been so miserly in terms of paying it back? Do I want to maximize the amount of money that Citibank extracts from me in interest payments? It certainly seems that way.

The truth, of course, is more mundane: I had no idea that I borrowed $200 on March 11, and Citibank certainly never saw fit to inform me of the fact directly. Instead, they buried the details of the loan on page 5 of my (unopened) bank statement. Meanwhile, they quietly and automatically deducted those small minimum payments out of my checking account — payments which were small enough that I failed to notice them until this morning.

As for the $200 loan, well, it turns out that March 11 was a very busy day for my checking account. I deposited a small check for $17.75, I made two different ATM withdrawals, I automatically transferred $1,000 to an investment account, I paid my Amex bill, I made another automatic payment which goes out every week — and, on top of all that, a $250 check which I wrote on February 12 was finally cashed that day as well. All of which was enough to push me $112.56 into the red. Citibank then immediately took the opportunity to round that number up to the nearest $100 — because hey, why lend me $112.56 when you can lend me $200 instead — and automatically deposited that sum into my account, leaving me with an account balance, at the end of the day, of $87.44.

This is a yuppie overdraft: rather than charge me $35 a pop for overdrawing my account, Citibank just rounds any negative balance up to the nearest $100, and transfers that sum over from something wonderfully called a “Checking Plus” account. Which is what they call an overdraft line of credit. Naturally, when my paycheck arrived four days later, it went into my checking account, which is separate from my Checking Plus account . As a result, ever since then, I’ve had a steadily positive balance in my checking account which has been larger than the amount I owe on its overdraft facility. And ever since then, Citi has been quietly paying off the loan at a rate of $12 or so a month, in the hope that I would never notice it. After all, any sentient being, upon seeing this situation, would of course pay the entire loan off immediately.

When I discovered what had been going on, my first reaction was of course to just pay the loan off in full. But my second reaction was that I wanted to ensure that I didn’t end up in this situation again. So I phoned up Citibank. “I see that you’re automatically deducting the minimum payment from my checking account every month,” I said; “do you think I could switch that to the maximum payment, instead?” If I ever have a balance on my Checking Plus account, I would very much like that balance to be paid off in full.

You know the answer, of course: no, Citi couldn’t possibly do that. Automatic payments can only be for the minimum amount due, not for the full balance.

So I tried another tack. If Citi couldn’t pay off the overdraft automatically, could it at least inform me that the overdraft existed? After all, Citibank has this wonderful thing called the Citi Alerting Service, whereby you will get a text message, or an email, or both, when certain types of activity take place on your account. You can get your credit card balance emailed to you every day! You can get a text message every time a check is presented for payment on your account! You can even be alerted to any new deposits!

So, I asked, could Citi alert me when there was activity on my Checking Plus account? Or maybe, could I use the Low Balance Alert to let me know when the balance on my checking account went below zero? Again, sadly, the answer was no. While the balance on my account did briefly dip below zero intraday, it was nice and positive — to the tune of $87.44 — by the end of the day, so the Low Balance Alert, which looks only at the end-of-day balance, would never have been triggered. And naturally, while it’s possible to get activity alerts for my checking account and for my credit card account, it’s weirdly impossible to get any kind of activity alert whatsoever for the overdraft loan facility.

By this point, it was abundantly clear what was going on: Citi was doing everything in its power to try to keep me in the dark as to the amount that I had unwittingly borrowed, and to try to ensure that I remained in debt to them for as long as possible. The story doesn’t end there, but I won’t bore you with the gory details, I’ve gone on way too long already. Suffice to say that once I started looking in detail at my statements, I saw that I didn’t need Checking Plus at all: I already have automatic overdraft protection from my savings account. (If I get overdrawn on my checking account, then the savings account will cover the negative balance.) Citibank simply inserted the Checking Plus product as the first recourse, presumably as part of the “exceptional service, special benefits and preferred access” I’m granted as a Citigold customer.

[tl;dr readers start here; everything so far can basically be summed up with the word "overdraft".]

The real story of what’s going on here, of course, is that Citi’s adversarial ways are a direct consequence of the “free checking” meme. Every bank wants to be able to offer free checking, and so as a result, every bank needs to find hidden, annoying ways to make money from its checking accounts instead. This is just one of many such ways. But it’s particularly galling to me, because I grew up in the UK, where overdrafts are much, much simpler: they’re just negative balances. The minute that sufficient money is deposited into the account, the overdraft gets paid off in full.

For the past 15 years or so, as long as I’ve lived in this country, I’ve had a “why can’t the USA be more like the UK” attitude towards checking accounts. In the UK, this kind of overdraft shenanigans doesn’t happen, ATM withdrawals are all free, etc etc.

And then I read John Lanchester’s masterful essay on the PPI scandal in the UK. Make sure you read it, even if you’re not particularly interested in British banking: it’s one of the best things ever written about bank malfeasance. But in a nutshell, all the UK banks made billions of dollars, over the years, selling something called payment protection insurance — a suite of products which were sold to bank customers, as Lanchester puts it, “in the knowledge that they were not and would never be of any use”.

In the wake of an important lawsuit, the banks have now been found liable for the the money they extracted from UK consumers over the years; the total amount they’re going to need to pay could well exceed $30 billion. That’s about $500 per UK inhabitant — the equivalent of a $150 billion settlement in the US.

No wonder the UK banks didn’t need to nickel-and-dime their customers on things like ATM fees and overdrafts — or, to put it another way, no wonder they didn’t feel the need to twist their regulators’ arms to allow them to do so. They were making so much money on PPI, they didn’t need to.

All of which is to say that retail banking is broken, it’s broken everywhere, it’s endemically reliant on hidden fees, and that if you think your bank is being transparent about how it’s making money from you, or if you think that your banking is free, then you’re almost certainly mistaken.

The solution to this problem is a combination of legislation and regulation — something which is more likely to happen in the UK than it is in the US. Necessarily, as those laws and regulations take hold, banks will be forced to move to a transparent system of monthly fees or the like. No one likes those things. But the next time you find yourself getting angry about fees which are out in the open, just remember that they’re probably preferable to the hidden fees they’re replacing.

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Comments
27 comments so far

Wouldn’t it be simpler to just keep a couple thousand in your checking account? You clearly have a ton of activity, and it isn’t like you are earning anything on your savings.

Will also note that a $35 overdraft is much higher than the $5 you have paid in interest. If you open your checking account statement once every three months or so, you’ll be fine,

Citibank is a money grubbing bank, not a “sentient entity”. But if its customers are even half-way sentient, they can manage.

Posted by TFF | Report as abusive

Maybe you should take your money to a non-profit cooperative like a credit union. They are geared towards service not profit.

Posted by RR23 | Report as abusive

I was reading your whole diatribe wondering if you just didn’t have a Citi savings account to hook your overdraft protection to. Are you saying that Citi made this “Checking Plus” loan the first overdraft recourse, higher up than your savings account, without telling you? Because that seems insane.

Posted by jfruh | Report as abusive

What citi did was definitely shady, particularly given the presence of your linked savings account, but there’s something to be said for doing two things (both of which I do, with a different bank)

- echoing TFF, I keep a baseline of $5K in my checking account at all times. even though I have linked savings (which mostly serves to keep my account above any “monthly fee” limits), I always keep a floor of cash in my checking. You just never know when you’ll need some super-quick access to emergency cash, in addition to the cushion it provides for the daily in and out of account activity.

- regularly monitor my accounts. I do two things here to make it super easy (I rarely open my statements either) – first, I use Mint to keep track of all of my spending, it will send alerts even if your bank won’t, and it’s also a handy way of seeing your entire financial picture in one place. Second, I have my bank alerts set up to not just alert me on specific transactions, but to send me a daily email summary of ALL account activity. Perhaps one or both of these things would have alerted you to the strange activity sooner rather than later.

Just my 2cents.

Posted by very-simple | Report as abusive

This is just more of the “corporations must maximize profits” mindset that ignores the corrosive impact their gotcha business philosophy has on customers. While many banks operate the same way as shitti, I mean citi, my question for Felix is why do you continue being their customer? There are other financial firms who don’t view your money as theirs.

Posted by KenG_CA | Report as abusive

The fundamental problem here is pretty simple: when a sophisticated economic actor receives privileged access to a person’s funds, it creates an opportunity. By withdrawing money without real notice or consent, a bank or merchant can skim money away from consumers without facing pressures to either reduce prices or provide a product worth the cost.

This is actually the exact same problem that you see with recurring charges on debit and credit cards. (Think FreeCreditReport.com.) In that case too, the ability to silently bill consumers has created a shadow economy, largely dedicated to squeezing as much money out of consumers as possible on the sly. The difference is just in the mechanism: for merchants, it’s contractual billing arrangements, while for banks, it’s that, as account providers, they can access accountholder funds with minimal consent or notice.

Felix, you tweeted out my paper about automatically recurring fees the other day, which proposed an “authorization catalogue” listing all recurring fees and letting consumers cancel them. (Thanks, by the way! For anyone else who is curious: http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=2285147.) You might be interested to hear that in the original draft, I actually proposed putting all bank fees on the catalogue as well. As I saw it, they were, at a certain level of abstraction, functionally identical to any other sort of preauthorized, contingent charge. I eventually decided that this would be practically quite difficult to implement, because of the different legal status of banks and third-party merchants. But ultimately, what bank consumers really lack is the same thing that FreeCreditReport’s customers do: a centralized accounting of all applicable charges, and the ability to opt out of them whenever they see fit. It’s that absence which banks have been mercilessly exploiting.

Posted by WHS | Report as abusive

Agreed with KenG, there are better places to bank. Citi has let you know in very clear terms how THEY view your relationship.

I’m still puzzling over how this managed to elude you for so long. Have you truly not balanced your checking account since March 11?!? I typically balance every week or two (easy with online access and Quicken) and cannot conceive of leaving it for more than a month.

Posted by TFF17 | Report as abusive

Now who was it that couldn’t be bothered to open their statement? You would probably find if they paid off the loan in full each time you would be paying more because of the number of loans it would trigger. You should be able to do a low balance alert, just make it for anything below a few thousand.

Life can be simple, you just need to forget about all those ‘conveniences’. It is no more expensive to always keep a few thousand in the bank than it is to try keeping a positive balance, all you need to do is live one month in the past. The same applies to credit; live in the future and pay dearly for it, or live in the past for free. It is free not only monetary terms but also in accounting, management, attention, and aggravation. That is true convenience.

Posted by MyLord | Report as abusive

Why do banks have to make money on small checking accounts at all? Why can’t they just be required by law to offer free checking without chiseling you with forced overdrafts and the like, just as part of the requirement for their charter and access to deposit insurance and all the other regulatory benefits they receive? God knows they’d still be plenty profitable.

I don’t understand this general argument of “holding the company’s profit equal, if they don’t screw us like this, they’ll have to screw us like that.” It seems like such a defeatist stance, and more corporatist than capitalist. Why can’t the profit simply fall? And do you really think that they wouldn’t charge a monthly fee AND run little scams like this on top of it, in both the US and the UK, if they can get away with it?

Posted by pete22 | Report as abusive

Why do banks have to make money on small checking accounts at all? Why can’t they just be required by law to offer free checking without chiseling you with forced overdrafts and the like, just as part of the requirement for their charter and access to deposit insurance and all the other regulatory benefits they receive? God knows they’d still be plenty profitable.

I don’t understand this general argument of “holding the company’s profit equal, if they don’t screw us like this, they’ll have to screw us like that.” It seems like such a defeatist stance, and more corporatist than capitalist. Why can’t the profit simply fall? And do you really think that they wouldn’t charge a monthly fee AND run little scams like this on top of it, in both the US and the UK, if they can get away with it?

Posted by pete22 | Report as abusive

This is why I am not a huge fan of Cass Sunstein style nudges. Listening to his public commentary, you’d think he wants to have the government do everything with nudges. It seems he’s not a fan of traditional regulation. Well, the problem is that the government can nudge, but you bet that the private sector is also nudging you. They will nudge you in every case where it’s legal. They will nudge in every case where some lawyer could make even a barely plausible justification that it’s legal. They will nudge you in every case where it’s flat out illegal but they figure they won’t get caught, or they won’t get caught before they make some money, or they will get caught but won’t get sanctioned enough to make it a money losing proposition. The hell with nudges.

Posted by weiwentg | Report as abusive

Weiwentg, you’re exactly right about that. Nudges rely on (supposedly predictable) irrationality. A far better approach is to create an environment in which the negative impact of people’s heuristics and biases are minimized, so that they can actually be rational about an economic decision.

Posted by WHS | Report as abusive

I have a very hard time feeling sympathy towards a bank customer who can’t be bothered to open his statement and then gets upset about the fees he is charged.

Similarly, I am somewhat skeptical that paternalistic “nudges” in the “right” direction will have my best interest at heart.

Posted by Publius | Report as abusive

This seems pretty standard, if unfortunate. I read it less as malign than reflective of a market where the public does not bank based on service, but convenience. There simply isn’t much market pressure to behave nicely, so this kind of line-of-credit backup is the best the market can deliver. My credit union, which actually and honestly has my best interests at heart, can only offer me what Citi has here, because that is what they can buy off the shelf.

As for keeping $N in your checking, reading your statements or (like me) setting alerts (the credit union system can do that) and checking online regularly, these are while effective further indictments of the marketplace.

And I am only too happy to pay an annualized 13% for a day or two if I have to cover something briefly. 13% for a day on $5,000 is less than two bucks.

Posted by wcw | Report as abusive

Citibank lobbied strong and hard for the right to lend you money @ 18.25% for your benefit, they would argue. Funny thing is that I’m not aware of any depositors writing letters to their Congressman requesting that same benefit, that incidentally generate very large sums of profits for the large banks. The whole thing is rather nefarious.

Posted by Sechel | Report as abusive

Wow. A bank with shady business practices. Never seen that before…

Mechanise the banks and remove the managers who live with and know their clients and see the industry’s reputation drop like a stone.

If you set up a mechanism that is sold to you on the basis of avoiding you going into overdraft, why do you need to look at your statement every time you get one? Well, apart from ID theft, fraudulent transactions, mistaken transfers, and all the other stuff…

Posted by FifthDecade | Report as abusive

I have accounts with Chase. They allow for automatic payments to be
a) the minimum payment
b) the last statement balance
c) the current balance due (ie pay in full).

Posted by Bodyopponentbag | Report as abusive

Chase allows auto payment of the full amount due.

Posted by Bodyopponentbag | Report as abusive

@Felix… I am so sad for you and your readers… there is no more damming condemnation of your cute little credit union possible than to admit you are a Citibank customer. Why on earth would you give them any of your time, money, or energy. In doing so you admit for the world to see that there are some things that Citi does better than your CU, or worse that Citi does some things that your CU can’t do at all.

Sadly that is almost certainly true. My little community bank excels at everything we do. Yet we simply can’t match Citi’s international services, we don’t offer credit cards at all, no brokerage either. For all it’s faults it seems that Citibank does still have an edge serving highly educated globe trotting finance bloggers.

Kudos at least for calling them out for their unethical business practices.

Posted by y2kurtus | Report as abusive

Hey, someone has to pay for those Citi Bikes. It turns out, that person was *YOU*, Felix.

On a more serious note, they cut my 19 year-old credit card because of disuse. If you’re not making them money, you’re not a valued customer, apparently.

Posted by GRRR | Report as abusive

1) This is why so many people prefer pay day lenders as their predators of choice. Really. Unlike banks, the pay day lenders give you the up front charges for every darned thing. They might be steep, but there are no surprises.

2) Banking as we practice it is basically obsolete. We should all just have Federal Reserve retail accounts or Treasury accounts and cut out the middleman. Computers and databases are dirt cheap to operate these days. The whole rationale for banks has vanished.

Posted by Kaleberg | Report as abusive

> I have a very hard time feeling sympathy towards
> a bank customer who can’t be bothered to open his
> statement and then gets upset about the fees he
> is charged.

I’m not certain why there should be an obligation on the part of the customer to constantly check that you are not being borderline-defrauded by businesses you are dealing with.

Next: No sympathy for someone failing to wear a concealed money belt when he gets pick-pocketed?

Posted by TomWest | Report as abusive

Retail banking is broken? Yes, retail banking is broken, but we’re not looking in the right place to fix it. Look, you don’t have to pay those fees and you don’t have to worry about or convict the banking system for not being transparent. Who do you deal with that is 100% transparent? Is our government transparent? They are the worst of the worst in that game. Is your employer 100% transparent? When you are denied a raise is your employer opening the books and showing you why you don’t get the raise? Of course not, so why look at the banking industry to be any different.

Strictly speaking of banking; we don’t have to participate in their game. Its a choice. You can cash your paycheck as opposed to depositing it in their coffers. You CAN maintain 100% control over every dime you earn and you do that by NOT handing your paycheck to them. Don’t give any “yea but’s” to that recommendation. You can do that if you choose and if you do you will be 100% immune from hidden bank fees. You control that choice, just like finding a new job or a new country to live in.

You also have the choice to find new ways of using the banking system as it exists right now. You CAN beat them at their own game. For example, use a checking account for its intended purpose; strictly as a conduit to pay your bills. A checking account should not be used as a holding pen for your income, there is no ROI. Think about it; who is the biggest benefactor to all of our deposits? Do you think that might be having an adverse effect on the financial condition of America’s consumer base?

How about credit cards? If you use a credit card as a tool and not a consumption device your income could be used continually throughout the month to either earn interest or abate interest. And when it comes to the interest we pay on loans: who said we have to abide by the conventional practice of amortized debt? Did you know every amortized loan (mortgage, auto, student) is an annuity? The formula used to calculate the amortization schedule is an annuity formula. How did we get suckered into funding someone else’s annuity under the disguise of a low rate and low payment. Talk about no transparency. I’ll bet 99% of you reading this didn’t realize this “annuity” scam.

Retail banking itself isn’t broken it is the way be which we, as consumers function within their business model. It is our involvement that is broken. Don’t blame the banking industry for having an extremely profitable business model. Blame yourself for participating and find alternative methods of operating within their model.

Posted by helocdoc | Report as abusive

You have my sympathies. I went through the same experience with Citi a few years ago, only the amounts were different. They also would not let you set up overdraft to a savings account where you have plenty of cash sitting around. You’d also run into trouble if you try to cancel that Checking Plus account.

Posted by junkcharts | Report as abusive

In respect of the PPI stuff in the UK. While the banks definitely missold the product to plenty of people I would estimate that by a significant majority the people being refunded their money now knew perfectly well what they were buying, were eligible for the product, and have just seen a quick way to get their money back after they never got to claim on the product.

Due to the proliferation of companies encouraging claims there are a huge number of people claiming compensation on this who never even had a financial product with the bank they are accusing, let alone even took out PPI with them. It has just got to the stage where it is easier and cheaper for the banks to pay it all out, get it over with as quickly as possible and just move on with trying to repair their reputation.

Posted by ABT | Report as abusive

That’s why I switched to Credit Unions years ago….

Posted by evodevo | Report as abusive

This stuff is a result of the rules barring the old overdraft-fine rules. Now there are new fines that comply (just barely) with the new rules.

TD BankNorth has taken a slightly different approach: first, they skirted the overdraft rules by leaving open a big fat loophole for electronic transfers — if you have given anyone direct access to your account, they can take out whatever amount they want, even if you don’t have it, unless you go into a branch and file a written request to block ACH overdraft. Then they just instituted a $100 minimum balance with large fees for dipping below it, which is brilliant because there’s no way of saying “I would rather bounce this request than go below my minimum balance.” This has made our joint checking account, previously used for groceries and such, essentially useless without a huge non-interest-bearing cushion.

Posted by paul314 | Report as abusive
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