13,000% Interest – The Secret to Bank of America’s Profits

Okay. I screwed up. Normally I am very careful with my bank accounts. I typically check all of my accounts every day to see what the balance is, and to look at any payments that may be scheduled to come out of my bank accounts. I do that for both my personal accounts and my business accounts. I am sure many of you do the same thing. However, I don’t keep a lot of money in my regular bank accounts. I like making a return on my money so I keep my extra cash in my brokerage account or other accounts that pay at least some sort of reasonable interest.

As I said I screwed up. For some reason I misjudged the amount I needed in my personal checking account. My balance was $326.14 (as I have said, I don’t keep much in my personal account – just enough to cover any payments that I issue). That day, two payments cleared. One was for $147.56 and one for $373.42. Covering those payments threw my account into a negative or overdraft balance. So what did Bank of America do?

First, bank of America cleared the larger payment rather than the smaller payment. This put me immediately in overdraft (I am convinced that Bank of America’s computer system is programmed this way to maximize their overdraft fee revenue). Now if they had cleared the smaller payment first, the account would not have gone into overdraft. It would only have hit overdraft when the second payment cleared. But because they processed the larger payment first, it immediately threw the account into overdraft for which I was charged a $35.00 overdraft fee. Then when they cleared the second payment, they charged another $35.00 overdraft fee.

It is interesting to note that at the time my personal account went into overdraft, my business accounts with Bank of America had balances of close to $100,000. Now if I pointed this out to someone at Bank of America I am sure they would say, “Well, we don’t know that those accounts are related.” Right. I’d believe in green people from Alpha Centauri before I believed that. Of course if I log into my personal Bank of America account I can see my business accounts because they are linked.

Once again, I admit I screwed up. But the penalty for $194.84 overdraft was $70.00. Do a little math. Given that I covered the overdraft the next day, Bank of America made 13,000 percent interest (yes, I’m not kidding – 13,000 percent) for covering my small overdraft for one day. Imagine if you could earn 13,000 percent on your investments. Maybe I can make Bank of America a deal and I’ll cover some of their overdrafts and they can pay me the 13,000 percent interest. For some reason I don’t think they’ll go along with my proposal.

I suspect the folks at Bank of America would justify this by saying that it takes time to process and monitor such overdrafts. Yes, maybe, 30 years ago when paper checks went to the branch and someone at the branch would have to return the paper check to the institution that had cashed the check and that took time and labor. Both of my payments were electronic and I would bet my Super Bowl betting money that the $35.00 was assessed by the computer, and that no human even looked at my account (and if a human did, then Bank of America’s systems are worse that I thought).

Again, I admit that I screwed up and in the scheme of things I can afford $70.00. Still it seems egregious to me that Bank of America can earn 13,000 percent interest for having their computer make some electronic entries in my account. Further, what about those folks who are not quite as fastidious as I am about my accounts? How much are they paying? As usual I suspect this policy really affects those people who are less savvy and don’t manage their accounts as well as I do. Meanwhile Brian Moynihan took down about $25 million in compensation for making sure Bank of America makes 13,000 percent interest on people like me who accidently overdraw their accounts. Maybe if I’m lucky Brian will buy me a drink next time he’s in town. But I doubt it.

Final comment. The day I posted this article I tried to log into my bank account, and for some reason I could not. I called the number on my bank statement to find out what is going on. After verifying my identity, listening to a very annoying recorded message, being given nine options to choose from, none of which was the problem I was calling about, I finally got the phone system to connect me to a live person. At least that was the plan. However after waiting for 20 minutes on hold I finally gave up. Maybe Brian could use some of his $25 million to hire some more folks to answer the phone.