If you are serious about your online business, you may or may not have a separate business entity for yourself (such as an LLC or even just a DBA), and I would recommend that you do. But you probably have (and definitely should have) separate bank accounts for personal and business use.
It is simple to set up a bank account for your business. Simply walk into your bank and tell them you would like to do so. What is not so simple is the sneaky tricks that may apply to business bank accounts, even if not to personal bank accounts (the same goes for credit cards by the way). If you are used to dealing with personal bank accounts, you may find yourself caught off-guard by the loopholes and slight-of-hand tricks attached to your business accounts.
This can lead to a false sense of security and you may be caught off-guard.
What am I talking about? Well, quite simply, let’s start with a statement of pure opinion (based on observation, but opinion none-the-less). Modern banks are not the most ethical organizations around. They (or whoever writes their policies) seem to be willing to stoop to just about any trick known to the imagination, to legally steal money from the unwitting and funnel it to the top of their chain of command. This is never very apparent until it actually happens. Your bank may seem nothing but friendly and helpful, till one day they slap you with $195 in fees for basically nothing, and your contact on the other end of the 1-800 number basically tells you to F___ O__.
Now that that’s out of the way – here is what appears to be happening. Over time, banks have become increasingly adept and adopting new policies which can allow them to extract money from their customers for frivolous causes, without giving much in return. From time to time, a federal law or some such is passed, to address this. However, these laws are sometimes/often only passed in regards to personal bank accounts (and personal credit cards). In addition to this, bank policy-makers still appear to be working hard to find and utilize every loophole they can – with complete disregard for logic or common sense.
A few examples. (Note: every bank has its own policy. These examples are based on my own experience with banks I have dealt with; they may not be 100% accurate and I can not serve as an official spokesperson for any bank, but this should at least give an idea of what I am referring to).
1. A bank provides a “service” which is really a disservice and a method of legally taking money in exchange for nothing. This “service” is called “Overdraft Protection.” That means that if your account has no money on it, and you go to make a purchase, the bank will go ahead and allow the purchase to go through. How sweet. How helpful. No? No. They will also assess all kinds of fees. So you can buy a pencil for 90 cents and wind up paying a $35 overdraft fee. If you buy six pencils as six purchases before you find out that your balance is below zero, you pay $35×6 ($210) for your six pencils.
2. A law passed last summer now somewhat forces banks to allow you to opt out of this “service.” In theory, if you opt out, the bank can not allow your payment for these six pencils to go through, if your account is already at or below zero.
There have also been some changes in the number of overdraft fees you can be charged for per day etc (though I am not sure what part of this is dictated by the law itself). So, for example, maybe you can only be charged four overdraft fees per day. So if you buy all six pencils on Tuesday, you only get charged four overdraft fees ($140 for 6 pencils). But if you buy three pencils on Tuesday and three pencils on Wednesday, you pay the full $210 for your six overdraft purchases.
Now comes the fine print.
3. This law on opting out of “overdraft protection” doesn’t apparently apply to business accounts. Daily limits don’t seem to apply to business accounts either, at least not with the banks I talked to.
4. Even in personal accounts, if there is money in your account when you make the purchase, you are not necessarily protected from overdraft fees. What? Yep. Here is how they manage that.
- The purchase is allowed to go through as long as you have money in your account at the time of the purchase.
- The fee still is assessed if your account balance is below zero at the time the payment is posted to your account.
Notice the sneaky switcheroo? If you are only able to opt out of purchases going through at the time of the purchase, then the fees should only be charged if your account has a negative balance at the time of the purchase. Right? That would be obvious. But that would be if the banks honestly wanted to allow you to opt out of their “overdraft protection” money-making scheme. And they apparently don’t. (With the exception of a few not-so-mainstream banks that don’t use these tricks).
So, on Tuesday you buy three pencils. You have $300 in your account on Tuesday. But the pencil store owner doesn’t get around to asking your bank for the money right away.
On Wednesday, you accidentally overdraft your account by $15.
On Thursday, the store owner has some more time on his hands, and he posts those three pencil purchases to your account. Now you have $140 in overdraft fees.
On Friday, you realize you have overdrafted and you instantly put $1000 in your account. You call the 1-800 number and say you transferred the money instantly from your smart-phone, as soon as you found out. You explain that you had the money but you had written a check off the wrong account.
Sorry, too late. Nuttin you can do about it. Haven’t you read the fine print when you signed up for your bank account? You really should read terms and conditions more carefully next time … In other words, “F___ Y__.”
There actually is something you can do about this if it happens to you.
1. You probably won’t get far with the 1-800 number. Contact your local bank branch and speak to someone there. If this doesn’t work, ask to speak to the manager. (See also this article on How to Reverse Bank Overdraft Fees.)
2. If all else fails, and you feel you are being assessed unjust fees that violate common sense and/or principles of fair exchange, you can take your bank to small claims court. Sound extreme? Well, it’s up to you. In some cases it is a matter of principle and not a matter of money.
To quote from the above video:
If a million consumers filed a million small claims court actions a year against the banks, the banks would either try to abolish the small claims court, or they would improve their performance.
What a Bank Representative May Tell You
I’ve heard bank representatives say some pretty odd things in defense of their policies. Granted, these representatives are primarily well-intentioned individuals who are just trying to do their jobs – they probably aren’t directly benefiting from the unreasonable fees and they certainly don’t write company policy. But they are trying to do (and keep) their jobs.
I’ve been told that the Federal Government created difficulties for the banks, by leaving these loopholes in their new laws, and that the banks are trying to find some way to resolve this so that they can serve their customers better! In other words, the banks feel forced to charge senseless overdraft fees whenever the federal government doesn’t make it exactly and literally illegal? They can’t themselves allow business customers to opt out, or change their policies to only charge overdraft fees based on the funds to hand at the time of the purchase, so that anyone truly can opt out? They are forced to charge overdraft fees at all? The government is coercing them to pay out expenses on your behalf when there are insufficient funds in your account, instead of simply declining the transaction?
I’ve also been reminded that banks do provide a service and they need money to operate, so it has to come from somewhere. Oh really, I was born yesterday. Yes, that’s true. Isn’t that why they charge exorbitant interest fees whenever they loan out money, while paying a percentage of a percent per year (if any) to customers who keep their money in the bank?
When you keep your money in the bank, you are essentially loaning money to the bank. The bank uses your money to loan to others, charging high interest. They pay you almost no interest in return, allowing for a heavy profit margin. (When I was 10 years old I received over 5% per year interest on my savings account – good luck finding that nowadays). So as far as I am concerned, it is a load of ____ that they need to charge $35 overdraft fees to make a living – instead of simply declining the transaction when there are insufficient funds.
How to Prevent and Avoid Overdraft Fees
- Make sure you have real-time alerts set up that will inform you (email, text message, etc) instantly if your account balance goes below zero. If it comes three days later (such as through Mint.com) it won’t help you at all. By that time you could already have hundreds of dollars in fees, even if you did not buy anything in the meantime, if a bunch of earlier transactions “posted” after your balance reached zero.
- Check your bank accounts manually every day, no matter how certain you are.
- Obviously, keep track of your purchases and expenditures, including purchases and checks that have not yet cleared or posted to your account.
- If you have multiple checking accounts, make sure you don’t mix up checks from different accounts. If you have money in Account A, and write a check off of Account B (thinking you are writing a check off Account A), you could be in trouble.
By now (if you’re still reading) you are probably wondering what happened to inspire me to write this missive.
I am a super-organized person. I check my online banking almost too often. I track my funds on grids, to a fault. But even I almost wound up paying $195 for a simple error of putting the money in Account A and writing the check off Account B, causing account B to overdraft. I also happened to be attending a school reunion and not checking my accounts for a few days. And my email alerts happened to not be working properly at the time. By the time I noticed, several earlier checks and charges had just happened to post to account while it had a negative balance. Each “overdraft” was charged a fee of $10 to $33 and it added up to $195.
Unfortunately it was the weekend when I noticed, and all I could do was call the 1-800 number. Which, as probably anyone could tell you, is completely useless. All it served was to infuriate me at the logic thrown at me by the poor souls on the other end of the line. The rest of the weekend gave me the opportunity to do the research which inspired this post, as well as to determine my course of action should the bank insist on holding to these charges.
Fortunately (for my bank) when I contacted my own branch on Monday, the charges were reversed. A key phrase I used when explaining what had happened to the bank? I explained that I had made an “administrative error” by writing the wrong check. The money was in my account, I just used the wrong checkbook. Since banks make “administrative errors” all the time, and don’t pay their customers $195 fees for them, I hoped they’d understand better if I put it in those terms. And apparently they did.