21

Specifically, to a checking account. I have not heard of, in a long time, any bank that will simply decline a charge if there isn't sufficient money. Either by default or even at the customer's specific request.

Instead, they let the account go negative, then charge you through the nose for it. (variously called an 'overdraft' or 'insufficient funds' fee)

P.S. I'm in the United States.

EDIT: Ben Miller's touches on the situation regarding physical checks. I'm also interested in debit cards specifically. In this case, the shop knows before giving the customer anything whether the charge was declined or accepted by the bank. And the bank obviously knows whether the money is available. Why not just decline the charge? I'd prefer that to getting an overdraft fee. But i've not yet seen a bank which even gives me the option.

  • I have not seen this. I have seen fees for bouncing a check, or the customer-selected option of overdraft protection via either an automatic transfer from savings (limited to a small number per month) or a line-of-credit loan (usually at a much lower rate than credit cards). If your bank is doing something different, either change banks or stop bouncing checks. – keshlam Dec 12 '15 at 12:09
  • (Listing exceptions is a "shopping question" and would be out of bounds here.) – keshlam Dec 12 '15 at 12:11
  • hmm your bank will decline e.g. a debit transaction without sufficient funds and won't charge a fee when it happens? – iPherian Dec 12 '15 at 12:11
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    The bank I've had long standing checking account at does default accounts into some kind of "overdraft protection" setup, but they would allow me to elect to not use this service. Have you explicitly asked your bank? "I have not heard of" does not equal "I asked". – user662852 Dec 12 '15 at 15:24
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    My credit union does in fact offer the option of having debit-card transactions be declined if there isn't enough money in the account to cover them. You have to ask specifically for this and they don't advertise it, but they can do it. – zwol Dec 12 '15 at 18:12
15

The reason they want the transaction to go through is because they make money that way. Remember the overdraft protection might incur a fee. If it does their experience may show them that the fee is a greater source of profit when balanced against the losses incurred because of insufficient funds. Even free overdraft transactions are limited.

If they didn't want to make money they would have a way to make sure that multiple overdrafts in a short time window wouldn't require multiple protection events. Remember each time they transfer funds they only bring you to zero. As it is now the coffee you buy after putting money on your subway fare card might also trigger an overdraft transfer.

  • 1
    I think Ben's answer provides a better explanation. Never assume malice when stupidity is adequate; never assume stupidity when inadequate information suffices. – keshlam Dec 12 '15 at 17:01
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    @keshlam: I tend to assume malice when big banks are involved. – BrenBarn Dec 13 '15 at 3:26
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    The most insidious example of this kind of behavior is when a bank will reorganize the order in which transactions are processed in order to maximize the fees they can charge. E.g. You have $15 in your account, and in one day you make a $2 purchase, a $5 purchase, a $7 purchase, and a $20 purchase in that order, and they'll actually rearrange them so that the $20 purchase comes first, so that they can charge 4 overdraft fees instead of just 1. Technically illegal, but many banks have been caught doing this sort of thing. – Darrel Hoffman Dec 13 '15 at 19:39
  • @DarrelHoffman interesting. Last time I had any reason to notice this (a few years ago), my bank (Chase) ordered them from smallest to largest. – RonJohn May 12 '18 at 22:42
17

Believe it or not, this is done as a service to you. The reason for this has to do with a fundamental difference between a credit card account and a checking account.

With a credit card account, there is no money in the account; every charge is borrowed money. When you get to your credit limit, your credit transactions will start getting declined, but if the bank does for some reason let one get approved, it's not a big deal for anyone; it just means that you owe a little more than your credit limit. Note that (almost) every credit card transaction today is an electronic transaction.

A checking account, however, has real money in it. When it is gone, it is gone. When a balance inquiry is done, the bank has no way of knowing how many checks you've written that have not been cashed yet. It is a customer's responsibility to know exactly how much money is available to spend.

If you write more checks than you have money for in your account, technically you have committed a crime. Unfortunately, there are too many people now that are not taking the responsibility of calculating their own checking account balance seriously, and bad checks are written all the time. When a bank allows these transactions to be paid even though you don't have enough money in your account, they are preventing a crime from being committed by you. The fee is a finance charge for loaning you the money, but it is also there to encourage you not to spend more than you have.

Even if you use a debit card, it is still tied to a checking account, and the bank doesn't know if you have written enough checks to overdraw your account or not. It is still your responsibility to keep track of your own available balance.

Every time this happens to you, thank the bank as you pay this fee, and then commit to keeping your own running balance and always knowing how much you have left in your account.

  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Dec 14 '15 at 15:08
8

The laws about this changed in 2010 with the new Overdraft Protection Law HR 1261.

§ 140B. (c) Consumer consent opt-In.—A depository institution may charge overdraft coverage fees with respect to the use of an automatic teller machine or point of sale transaction only if the consumer has consented in writing, in electronic form, or in such other form as is permitted under regulations of the Bureau.

Now when you sign up for a bank account you have to opt in to overdraft coverage (the bank transfers funds from other accounts to cover overdrafts), or overdraft protection (the bank simply bounces NSF checks).

I'm pretty sure you could always set this option on your account, but banks were defaulting everyone's account that didn't think to ask such that overdrafts got paid and incurred fees. The law now prohibits them from using that as the default option.

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    That law doesn't apply if the OP is located outside of the United States. – AStopher Dec 12 '15 at 19:57
  • Obviously. Where does it say that OP is outside the US? – JohnFx Dec 13 '15 at 4:16
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    +1 this is actually the correct answer. Any bank (in the US) that is still doing this without your consent is in violation of the law. My bank (local) has always been very good about not doing things like this. – R.. Dec 13 '15 at 5:08
  • Just gonna +1 instead of arguing whether the questioner is in the US or not ;-) Point is, contra the question not all accounts do what the questioner says they do. If the questioner's bank does insist on this then maybe they're not in the US, maybe they're in breach of the law, and maybe the questioner needs to flip an option somewhere or open a new account. We can't always figure out which if questioners can't be bothered telling us what jurisdiction or typical business practices are relevant to them. – Steve Jessop Dec 13 '15 at 18:36
  • OP has clarified in a comment on the original question that they're in the U.S. and has tagged as such. – reirab Dec 13 '15 at 21:34
1

This really should be a comment, but I can't yet. The question desperately needs a location tag.

In at least some countries(New Zealand), the default action on all insufficient funds transactions is to refuse the transaction. Credit cards are the only common exception. Every bank operating in NZ that I know of acts this way. Sometimes there is a fee for bouncing a transaction, sometimes not, that depends on the bank.

Any other option must be explicitly arranged in writing with the bank.

Personally, coming from a country where declining transactions is the default, I'd be shocked and angry to be stuck with an automatic transfer from another account. Angry enough to change banks if they won't immediately cease and desist.

  • thx - added United States tag – iPherian Dec 13 '15 at 20:22
  • I'm pretty irritated myself, indeed. – iPherian Dec 13 '15 at 20:23

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