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 business expenses out of your own pocket? Of course not! So when we discuss banking, we must first understand 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 DDAs, demand deposit accounts. This means that when you deposit money into your account, you have the right to withdraw it from the account. But understand, you can only get out what you put in.

Electronic banking (debit cards and ACH transactions) greatly increased the opportunities for NSF fees, because people got used to using “floating” or “kiting” checks. Under the old manual banking system, the float could be 7-10 days for out-of-town checks. If a check was sent to pay a bill, it took 2-3 days for the payment to arrive. The company then had to deposit the check into your account at your bank, which meant it was probably deposited the day after you arrived. Then, if your account was in a different bank, your check had to be sent to your bank and was probably deducted the next day. So you could easily have 3-5 days before your account check cleared. Most people knew this and had the time to wait a couple of days before depositing money into their account.

However, bankers argued forcefully before Congress that the check should be counted as a overnight transaction because the recipient processed it a day or more before it was deducted from the payer’s account. This resulted in the federal law known as Check 21. It gave banks the right to process checks that 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 were counting on the “float”.

Remember, checking and savings accounts are demand DEPOSIT accounts. No client has the right to use funds that they have not deposited before the transaction. Until we understand and accept this, we cannot understand why NSF fees have become such a major source of profit for banks.

Electronic banking greatly increased the chances of overdrafts when transactions are completed before deposits. Debit card transactions used to be a huge source of profit for banks until 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. Preauthorized monthly transactions are typically ACH debits. If you forget you authorized a payment and the money isn’t there, here comes the NSF fees.

Now why are the NSF fees so high? There are a couple of reasons why they are in the price gouging category. First of all, the courts and the government refuse to ban NSF fees. Why? I do not know. So it seems that the banks feel they have immunity to these fees and they keep raising them higher and higher. Second, government banking regulations have eliminated many traditional sources of profit for banks, so they raise NSF fees to increase their revenue.

What can you do to avoid having insufficient funds charges assessed to 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 always works.

It is unfortunate that the least informed and disciplined people in managing their accounts are the ones who contribute a large part of the income to the banks.

By the way, let me remind you how your debit card transaction can result in non-sufficient funds fees. Banks process transactions at the end of the day in this order: prior day credits, prior day debits; credits the same day, debits the same day. And they process the largest transactions first, then in descending order from largest to smallest. So, if you make a debit card purchase for $100 at night 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, overdrawing your account. Of course, the debit card overdraft cannot be charged an NSF fee. BUT, the check for $75 will further overdraw your account and WILL result in an overdraft fee. Oh!

Now suppose that on the 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 charges per banking day. Very kind of you. If your bank charges $35 for overdraft transactions, you will be charged 6 NSF fees totaling $210. You have to deposit that amount into your account, plus enough money to cover the negative balance in your account. If you don’t do it within 90 days, most banks will close your account and send the full amount to a collection agency.

Would you like to have an active part in reducing the income of banks? Can!!! Just follow the principle: if the money isn’t in your account yet, don’t spend it. Responsible money management on your part reduces your contribution to your bank’s profits. Be happy!