Why debit cards are a bad deal

Debit cards are at the heart of the battle between consumers and banks.  Until the overdraft protection laws from the Credit Card Act of 2009 took affect in August of this year, banks made $38 billion a year in overdraft fee income.  Banks can still reap huge rewards from the overdraft income stream by cajoling consumers (like Chase does) into signing up for voluntary debit card overdraft protection, or by allowing ACH transactions linked to debit cards (automatic payments, PayPal money transfers) to go through despite resulting in a negative balance.

An article in the Wall Street Journal today outlines another reason why using your debit card is not a good idea; your exposure to losses related to theft is far inferior to that if your credit card.

One of the big selling points of debit cards, highlighted in ad campaigns and on bank websites, is that you’ll have “zero liability” for losses if your card is lost or stolen—just like credit cards.

Turns out that’s only sort of true.

In fact, nearly every debit card comes with restrictions in cases of theft. Some banks limit your coverage if you are slow to report a lost card or potential fraud. Some don’t cover fraudulent ATM transactions. Some may require that you show “reasonable care” in protecting your card or PIN number.

The matter is a significant one. There were 38.6 billion debit-card transactions last year, far more than the nearly 23 billion credit-card transactions, according to the Nilson Report newsletter in Carpinteria, Calif. Banks encourage customers to use debit cards, since they are far more lucrative than cash or checks.

The loopholes grow out of different federal regulations for different cards. Under federal law, your losses from unauthorized charges on your credit card are limited to $50, and there is no time limit for when you must report the problem. Many issuers go further, waiving all losses due to unauthorized credit-card use.

Debit cards, by contrast, are covered under a different law, and the rules are much more complex. If you call your bank within two business days of discovering your card is missing, your losses are limited to $50. But if you wait, you could be on the hook for up to $500. And if you don’t report the problem within 60 days after it shows up on a statement, you might face unlimited losses.

In the late 1990s, and went beyond those requirements, promising reduced liability for their branded debit cards. But there are several loopholes: Visa’s “zero-liability policy” doesn’t cover ATM transactions, some business cards or PIN transactions that don’t go through the Visa network. It does cover transactions where you sign, which bring in more revenue than PIN transactions.

MasterCard doesn’t cover any transactions that require a PIN, and it won’t cover more than two theft events in a 12-month period. You must also exercise “reasonable care” to prevent your card from being misused. But that term is subject to interpretation. Have you failed to show reasonable care if you forget your card at a restaurant? That depends on the circumstances and your bank, a spokeswoman says.

Read more …

It is very easy for a bank to simply claim that you didn’t use sufficient care in protecting your debit card, or that there is no evidence of fraud (i.e. they accuse you of falsely calling a transaction you did as fraud), sometimes despite evidence that you were thousands of miles away.

Overall, you are better off using a credit card for transactions that you want to do electronically and then paying the bill off in full every month.

Chase lost paperwork and delayed response not limited to loan modification

Here is a recent experience by someone dealing with an insurance claim due to a burst water heater.  The insurance company paid the check immediately, but Chase dragged its feed and caused all kinds of problems.

On December 24, 2009 the water heater in my home went. There was 40 gallons of water on the first floor of my home. Called the insurance, GECO, and they were great about getting people out to help us. The claim was settled and the check issued at the end of February 2010.

Then we had to send the check to Chase Loss Draft Dept. That is where the nightmare began, and still continues, over 8 months later. The first time the claim was sent in (FEDEX) they claimed to never have received them. Then when I got proof of delivery, they claimed to only have received some of the papers that were enclosed.

I faxed everything to them a few days later. We were told that in 3 to 5 days we would have our money.

With that we start looking at kitchens, since that is where the majority of the damage happened. Mold was found in the walls that seperate the utility room from the kitchen. Everything in the kitchen had to be ripped out down to the studs in the wall.

We went to Ikea to get the kitchen. This way we could stay within our small budget. Submitted the papers to Chase and they said, again it would take another week or so to get the funds. The money never came.  Called them again. They claimed to not have the papers, AGAIN!

This kept happening over and over again. They lose EVERYTHING! Finally, in July, YES JULY, there was some repair work that had to be done by our homeowner association. The town building inspector came to see what was done, and we were told that our child could not live with us because we did not have a functioning kitchen. (we had no sink) He was going to write us up and in 30 days would have to start paying fines, also CPS would be called.  Told Chase about what they had done to us and the fines that they would have to pay…SURPRISE! Within 3 days our check showed up.

How are they allowed to operate like this?

For those of you not familiar with how this works, your insurance company issues the check in the name of you and the bank that holds your mortgage.  That is why the homeowner had to forward the check to Chase to actually get their money.

I did a little research and this type of problem with the Chase Loss Draft Department is not uncommon, all you have to do is search on “Chase Loss Draft Department.”

Did Chase employees lie to avoid getting stuck with a counterfeit bill?

This story is a little worrisome.  It’s one thing if an institution like a bank is out to cheat you through small print or policies that are heavily stacked in their favor.  But it is entirely another thing when a bank or its employees will flat-out lie to protect themselves.  In this case the evidence seems to implicate that Chase employees lied so as not to get stuck with a counterfeit bill.

What’s behind the Chase utility bill promotion?

Chase is offering $20 if you simply enroll your debit card in their bill-paying service and pay at least 3 bills.  What is their motivation for doing this?

Chase is one of the banks that has been aggressively pushing customers to sign up for automatic overdraft protection for debit cards.  A better name for this service would be punitive overdraft punishment.  This has been a huge money maker for Chase in the past and they are looking to regain some of the revenue they stand to lose since new government regulations banned them from turning this service on for all new accounts, without customers being aware of it. Fees from overdrafts have brought Chase billions of dollars of income per year in the past.

This so called overdraft protection will allow you to use your debit card even when there is no money left in your account, at the cost of $35 per overdraft.  Chase has been accused in the past of ordering debits and credits to maximize overdraft likelihood and revenue. While the new laws prohibit banks like Chase from having overdraft protection on by default, there is an important loophole:  They can still opt to process automatic/recurring debit card payments, such as for a utility bill, even when it would draw your account below zero.

So why is having you sign up for bill payment with your debit card good for Chase?  Automatic payments to your debit card are likely to cause your checking account balance to be recorded improperly in your checkbook.

Even the most diligent of people is likely to forget to account for recurring debit transactions either before or after the fact, which means that they will likely not plan for a sufficient balance for an upcoming debit transaction for a utility bill, or will forget to record it and assume their balance is higher than it is, causing an overdraft to occur (if they opted in to overdraft protection).  Either way, Chase greatly increases the likelihood that they will capture significant overdraft fee income by getting customers to sign up for automatic payments on their debit card.

This is not a good deal.  If you want to automatically pay your bills, use a credit card, which won’t have the same problems.

More details on Chase’s website crash emerge

From this article, much of this information seems to be from tips from a Chase insider.

There was a subsequent outage on Wednesday, apparently due to the huge number of access retries after the initial restoration of service.

There was a definite operator-error contributing cause, perhaps the error would not have happened if people weren’t so exhausted from dealing with the database outage.

Simply said, Chase’s website was not adequate to handle all the traffic when a larger than normal percentage of Chase customers tried to log on, and many people were unable to successfully log on for much of Wednesday, and that an error by Chase technical personnel exacerbated this problem.

Monash said JP Morgan Chase runs its user profile Oracle database on a cluster of eight Solaris T4520 servers, each with 64GB of RAM, with the data held on EMC storage. El Reg is told that Oracle support staff pointed the finger of blame at an EMC SAN controller but that was given the all-clear on Monday night.

Monash subsequently posted that the outage was caused by corruption in an Oracle database which stored user profiles. Four files in the database were awry and this corruption was replicated in the hot backup.

Recovery was accomplished by restoring the database from a Saturday night backup, and then by reapplying 874,000 transactions during the Tuesday.

For the non-technical folks in the audience, a piece of storage hardware failed and subsequently caused the databases to get corrupted in both the live and real-time backup.  Most databases of this type have many layers of backup, and that was the case here.  In addition to periodic backups, a typical system will keep a “journal” of any activity that is applied so that in a worst case scenario like this, the list of database changes can be applied and the data from the older backup can be updated with all subsequent changes.  But it can take some time.

It seems likely that at some point during the outage Chase must have known what was going on and that they would eventually be able to fully restore the service and no data would be lost, which makes it even more perplexing that they didn’t release any statements to this effect.

This Oracle database stored user profiles, which are more than just authentication data.Applications that went down include but may not be limited to:

• The main JPMorgan Chase portal.
• JPMorgan Chase’s ability to use the ACH (Automated Clearing House).
• Loan applications.
• Private client trading portfolio access.

So, clearly more than just account access and bill-pay were affected.  ACH transactions include things like paying an Ebay auction using PayPal, which comes from your checking account.  They should have released information better telling people what was and was not affected while the outage was occurring.

Chase says not raising rates on small business cards, but is

What can you make of this bit from a recent article on small business lending:

Attorney Eric Dixon sat down at his 23rd Street office last month to check his accounts online, including that of a credit card issued by J.P. Morgan Chase. He was surprised to see that the minimum payment on an account balance of less than $5,000 had jumped into the triple digits.

“That made me look for the rate,” he says.

Mr. Dixon insists he’s never missed a payment—he uses the card for the occasional marketing purchase and as a cash-flow cushion—so what he saw came as a shock: The rate had jumped from 6% to 9%.

J.P. Morgan says it is not raising rates on its small business cards, but could not offer more details about Mr. Dixon’s story. But the scenario Mr. Dixon describes is increasingly common. Small businesses weren’t covered in the new financial reform bill that enacted consumer protections against practices like hair-trigger rate increases.

What makes this a more serious problem is that credit cards have quietly grown into the central piece of the small business financing system. As bank loans became harder to come by and the paperwork more demanding, business owners put their debt on their cards, sometimes at rates that would make consumers’ eyes pop.

A survey by the Washington, D.C.-based National Small Business Association found that among companies with fewer than 500 employees, 34% carried more than a quarter of the company’s overall debt load on a credit card.

More than 70% of owners with a card used for business expenses reported paying interest of more than 10%.

Mr. Dixon—who works for companies and people caught up in state investigations—has a client in the pet care business who financed her company entirely on credit cards. Debt in the six figures, at rising interest rates, is now crushing the company; she is, he says, considering personal bankruptcy.

Classic.  Chase says it isn’t raising rates on small business cards but can offer no explanation.  I’ll offer an explanation:  Chase is raising rates on small business cards despite what it is saying.

Do you need to be in the news to get a loan mod with Chase?

This story is so typical Chase.  Family falls on hard times, in this case because they have a gravely ill child.  Chase has initiated foreclosure proceedings in parallel with the homeowners seeking a loan modification and days before the foreclosure sale is scheduled, Chase tells them that they have been approved for a HAMP loan modification.  But, the papers never arrive and the house is sold back to Fannie Mae.

The reason this case didn’t stop there is that the Washington Post wrote a story on this particular family and their plight, and Chase decided that they would take a second look at the families situation.

For one thing, under Fannie Mae protocols (Chase just serviced the loan) the family should have been offered other modifications options.

So the publicity put pressure on both Chase and Fannie Mae and they discovered the case had not been handled properly.  The foreclosure has been reversed and the family is being offered other modification options.

Is this really the only way to get treated fairly by Chase contact the press?

Should “big” and “bank” be in your vocabulary together?

Bank of America (largest bank in the US) CEO Brian Moynihan, new on the job, shared his vision for the bank’s long term strategy on Tuesday.  Banks are being closely watched as they start to outline the ways in which they plan to recapture revenue that they are losing due to stricter regulation from the Credit Card Act of 2009, which has limited quite a few fees.

Some banks, like Chase, plan to get sneaky and use tricks to regain the lost income.  BofA showed some early indications that it might be heading down the straight and narrow path when it announced (in a splashy WSJ ad) it was doing away with its overdraft protection for debit cards entirely, having decided that it just wasn’t in the best interest of customers to continue the program.

So it was with some hope that I read about the new BofA CEO’s plans for the bank.

• The main focus is going to be making existing customers more profitable rather than seeking new customers.  They plan to do this by cross selling their various products to their existing customer base.  My concern is that this means customers can probably plan to be bombarded with mailings and harassed by bank staff constantly.  If they can pull this off without annoying people, perhaps getting different services from a single institution can be more efficient and cost effective for customers.
• BofA will focus on more modest and less volatile profits than before.  I read this to mean less focus on risky customers which likely means less focus on practices that make customers unreliable, like sudden and drastic interest rate increases, credit line decreases and punitive overdraft type fees.

But in general he completely missed the opportunity to talk about serving customers better.  After all, that is really what has changed over the last few decades with banks – they have gone from being institutions that were boring yet predictable in their financial results, and primarily focused on serving customers.  There is a huge need for one of  the large banks to lay claim to really serving customers, not just the lip service banks provide and then turn right around and screw you.  Only time will tell what type of bank BofA will be.

Granted, Brian Moynihan  was talking to investors, so perhaps it wasn’t the time and place to talk about the customer.  Still, I was disappointed and it made me wonder if there is really any use for big banks for people who want to be treated like a valued customer.