Now that the Senate has passed the massive financial overhaul legislation, the much debated bill is waiting President Obama’s signature. Among the many affects of the law is a cap on “swipe fees.” These are the interchange rates that merchants must pay the banks that manage the electronic payment networks for credit card and debit card transactions. For years gas stations and most retail merchants complained, rightly so, that the swipe fees were too high and that they kept rising, with no end in sight.

Illinois Senator Dick Durbin added an amendment to the financial overhaul legislation which directs the Federal Reserve to issue rules to ensure that debit card swipe fees are reasonable and proportional to the processing costs incurred. Right now Visa and MasterCard charge debit swipe fees of around 1 percent to 2 percent of the transaction amount — among the highest rates in the industrialized world. The Durbin Amendment, as it became known as, did not address credit card swipe fees, which are higher than debit card swipe fees and will likely remain so.

The new law also prevents card processing networks from forcing transactions to be run on only one card network. By giving merchants the option to run on more than one network, the hope is that competition will keep interchange rates down. Merchants can now also decline to allow a consumer to use a credit card for small transactions (say less than $10) where the interchange fee would represent too great a percentage of the overall purchase. This means that stores and gas stations can offer discounts to buyers who use cash or a debit card over a credit card, or conversely charge a fee to credit card holders to cover their higher swipe fee costs.

So, the bottom line is that lower swipe fees are good for the consumer. Banks, however, lobbied hard but failed to protect the fat profits they have made by continually raising interchange fees to merchants.

Wal Mart could revolutionize banking the same way they did retailing, as a low-price leader. This has banks scrambling to prevent Wal Mart from becoming a full fledged bank. However, Wal Mart has already opened hundreds of Money Centers with store locations where customers can cash checks and receive money orders. Wal Mart, not surprisingly, has undercut its competition with lower fees for these services.  The corporation recently announced plans to open another 400 Money Centers in the coming months.  Recently, Wal Mart also purchased a minority stake in Greendot, provider of Greendot MoneyPaks as a way to reload prepaid cards.

Wal Mart is currently prevented from offering checking accounts. But it recently made some technical moves that could potentially allow it to make loans and accept savings deposits.

According to an MSN Money article, the potential benefits of Wal Mart’s competition against banks and check cashing businesses include:

But imagine for a moment if the world’s biggest retailer put the pricing squeeze on one of the world’s more profitable businesses: financial services. Who would pay the price? Perhaps:

• Mortgage lenders who surprise their borrowers with last-minute junk fees.
• Banks that nickel and dime their small account holders to death.
• Auto lenders who add discriminatory surcharges on loans to black and Hispanic buyers.
• Credit card companies that use every excuse to jack up rates.

Check cashers and payday lenders that levy usurious charges on their customers.

More than one in four consumers had a debit or credit card replaced in 2009 due to security issues, according to a research firm that tracks the financial services industry. The reasons vary from lost cards that had to be replaced to security concerns. According to the research firm Javelin Strategy, a large number of those had more than one card replaced or a card reissued more than once. Javelin conservatively estimates that the cost to financial institutions to reissue cards was $252 million in 2009.

Among the research findings:

• More than one in four of all U.S. consumers have received a data breach notification.

• New accounts fraud – which is the most difficult to detect – accounts for a large percentage of the growth in identity fraud over the past two years.

• Consumers often either no longer use a card or use it less after it is reissued.

• Banks are viewed less favorably by 38% of consumers after they receive a breach notification.

Changes in the law in the majority of states, as well as a new rule that went into effect June 1st, mean that banks and other financial institutions must do more to identify and detect “red flags” that signal possible identity theft. Yet the study found that these notifications are not appropriately spurring consumers to action. If you have been notified by your bank that there has been a security breach on your account, you are nearly five times more likely to experience fraud than consumers who have not been contacted about such breaches, according to Javelin.  The report costs $1,200 but you can read a press release about it here.

For the unbanked who want to get a checking account, it can be a challenge finding a banking education training program that can sometimes be a prerequisite for obtaining a “second chance checking account.” One such program, the Get Checking Program sponsored by the parent company of ChexSystems ended January 1, 2009.

Fidelity National Information Services Inc, a Jacksonville-based provider of financial services to banks and other lending institutions, apparently did not wish to keep the program going, even though it helped people who were on the ChexSystems list obtain a checking account after some training on how to avoid the problems that got them on the ChexSystems list in the first place.

A new nonprofit program, CheckingNetwork USA, would seem to hold promise as alternative, but 1 1/2 years after the demise of “Get Checking” little information is available to potential users. According to the group’s Facebook page, CheckingNetwork USA is a “…financial education, certification and checking account access program designed to help individuals without a banking relationship gain financial knowledge and access to mainstream financial products and services.” But the group only has 24 fans. and the page was last updated several months ago.

Some banks that offer “second chance checking” accounts offer financial education workshops. Similarly, some community colleges offer classes on financial literacy or education on how to maintain bank accounts in good standing and organize household finances.

Of course, many people who have trouble getting a checking account turn to prepaid debit cards as an attractive alternative.

ChexSystems, Inc. is a subsidiary of Fidelity National Information Services, Inc., a publicly traded company (traded on the NY Stock Exchange under the symbol FIS). You won’t find much information about ChexSystems, however, on the FIS website, no doubt because they don’t want to be contacted by angry consumers. ChexSystems was incorporated in 1985 and is based in Woodbury, Minnesota with the aim of helping financial institutions identify applicants whose bank accounts have been “closed for cause” such as insufficient funds or bad check writing and who may pose a risk for fraud or account abuse. It does this by keeping consumer records from participating financial institutions. To be sure, the service it provides does help banks avoid fraud and remain profitable. But it also makes it difficult for many people who have lost checking accounts be able to get a new account with another bank.

As a consumer credit reporting agency (CRA), Chex Systems must adhere to the Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission.

According to the FDIC 87% of banks use ChexSystems to screen people before opening new accounts. Be cautious about the various websites that promote lists of banks that don’t use ChexSystems. In addition to charging you money for the list, often these lists are out of date, inaccurate, or woefully incomplete. In addition, banks may simply be using a competing list like Telescan or Telecheck.

Under Federal law, you have a right to know what is in your file from any CRA including Chex Systems. Simply submit a request in writing and the company will have to send you your file. You can order your report for free directly from Chex Systems. If you let the company know that a bank has denied you an account within the past 60 days because fo the ChexSystems list, you should be able to get your report for free. The standard fee is $8 for the report.

Flickr image by Get Down

New Federal Reserve rules take effect July 1^st to give consumers more protection against bank overdraft fees on debit cards. Up until now, many banks automatically offered overdraft “protection” for debit cardholders. That meant that if a debit cardholder had insufficient funds in his or her account to cover a purchase or ATM withdrawal, the bank would allow the transaction to go through, but then could charge an overdraft fee. A study of 462 banks by the Federal Deposit Insurance Corp. showed that overdraft fees range from $10 to $38, with a median average of $27.

Overdraft fees on debit cards generated more than $20 billion for banks in 2009, according to the New York Times. Banks earned another $12 billion overdrafts caused by check writing, which this law does not address.

A study by the Greenlining Institute, a think tank focused on multiethnic public policy, indicates that bank overdraft fees hit low-income consumers and people of color the hardest. That’s because people new to banking and/or with low incomes tend to maintain low bank balances. These are the very bank customers who can least afford to bear the burden of extra fees.

Under the new law, consumers must opt-in for overdraft protection on debit cards. Without it, a debit card transaction would simply be declined at the point of sale if there were not enough funds in the account to cover a purchase. For transactions that did go through and the bank would have to cover the overdraft without charging a fee. To protect their lucrative revenue stream, banks are beginning to send out alarming marketing messages urging debit card holders to opt into an overdraft service or risk not having to make payments “even in an emergency” that result in overdrawn accounts.

Overdraft Charges: Banks Game the System

The Greenlining Institute report also points out that many banks have gamed the system to maximize the fees they can collect by “reordering” purchases in a given day to count the most expensive one first. This way, they raise the chance that each additional purchase can count as an overdraft if the highest purchase of the day wipes out your account balance. For example, let’s say you have $100 in your account. You use your card to buy lunch for $10, you fill up your card for $30, you buy clothes for $50, and then you pay a bill for $60. If the bank processed these transactions in the order that they were made, only the last charge would be counted as an overdraft. But by processing the $60 and $50 transactions first, the bank then counts the $10 and $30 transactions as overdrafts and charges you two overdraft fees instead of one.

The Institute concluded that despite changes in the law, overdraft fees are still too high and continue to affect low income consumers disproportionately. With widely varying policies among banks, and hard to follow fee structures, consumer continue to be at risk for being hit with unexpected and costly charges.

Few Prepaid Debit Cards Allow Overdrafts

Because prepaid cards are not tied to a checking account, prepaid card issuers are not inclined to allow overdrafts or collect overdraft fees. This is because cardholders could potentially make a purchases with insufficient funds on a card and then fail to load money onto the card to cover the overdraft. Thus, when an attempted purchase is greater than the amount of funds available on the card, the transaction will simply be declined. This is largely seen as a benefit by prepaid cardholders. Prepaid cards are a positive alternative for consumers who have been denied checking and have trouble obtaining a credit card or other kind of debit card.

About MiCash and the MiCash Prepaid MasterCard

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ChexSystems is a credit reporting service used by banks to weigh the risks of accepting new customers. According to bankrate, 80 percent of all banks and credit unions use the service, which is offered by a company called eFunds. If someone is on the ChexSystems list, which is regularly updated with the latest information from other banks, a bank can see the reasons why. It might be because the person bounced a check, intentionally or by accident. Or the person might have outstanding unpaid fees. Or he or she may have lied on their application.

In many cases, it’s possible to contact ChexSystems and request a copy of your listing, if you have been denied a checking count in the past 60 days. Telescan is a similar service and you can do the same for its list. It isn’t convenient or easy, but if you do not have a track record of outright fraud, it is possible to pay outstanding bank charges, and then these reporting bureaus will note that fact as part of your record.

Some banks will not accept you as a customer as long as you remain on the ChexSystems or Telescan report. Others may offer you a checking account with higher fees.

Steps for Working with ChexSystems

1. Get your report by mail or on on the web at chexhelp.com. Call ChexSystems at (800) 428-9623 or (800) 513-7125 or send a written request to:ChexSystems Customer Service
   12005 Ford Road, Suite 600
   Dallas, TX 75234-7253
   Fax: (972) 241-4772
   Local (972) 280-8585
2. If you see anything in your report that you believe is inaccurate and you wish to dispute, write a letter asking ChexSystems to verify the information contained in your report. You should also ask for copies of the backing documentation the company may have relating to the disputed listing. And don’t be shy about requesting to have the information deleted from your file.
3. Keep copies of everything you send, and consider sending them by certified mail. ChexSystems should respond within 30 days, but if they don’t you can report that fact to the Federal Trade Commision.
4. If anything is accurate in the report, but actionable on your part, such as paying off outstanding obligations, then take action to clear up the listings. Then document the change and send the information to ChexSystems.
5. If you discover that you are a victim of identity fraud, because what you see in your report has no bearing on anything you have done, then file a police report.
6. Stay in contact and send follow letters as needed to ensure that ChexSystems is actively pursuing changes to your file. And if you succeed in expunging your record, open a checking account right away.

A report by the Aite Group, a leading independent research and advisory firm, states that 14% of checking account users would save money by having a prepaid debit card rather than a checking account.

For years, banks in the United States have viewed unbanked and underbanked consumers as a promising segment they could address through traditional checking account relationships. Few banks have realized that new technology and financial products may actually render the checking account relationship less attractive to this customer segment. In fact, at least 14% of checking account holders would be better off switching to a prepaid debit card. (Read the article on Aite’s website).

So who are these people? Their average savings range from zero upwards of $1,900, according to Aite. Generally speaking, the less able you are to maintain a minimum balance, the more likely you are to inadvertently bounce checks and pay overdraft fees and other related fees. The more likely you are to establish an account that may not suit your needs as far as online banking, phone banking, and checking your balance through text messaging. You can manage a prepaid card account all three of these ways.

ChexSystems is a credit reporting agency that has been in existence for many years.  ChexSystems offers data to banks (and gathers data from banks) on how a consumer has handled deposit accounts at banking institutions. The company today is managed by eFunds Corporation, a publicly traded company.

Unless you work at a bank or have been denied opening a bank account, you probably haven’t heard of ChexSystems. As a service to help banks limit their exposure to fraud and credit risk, ChexSystems maintains a list of individuals whose previous bank accounts have been “closed-for-cause.” These causes range from outright fraud, such as writing bad checks, to other causes that present a credit risk or potential for fraud. ChexSystem reports on such risk factors as:

• Account holders who report lost or stolen checks and have closed their account for this reason.

• Account holders who have had extended negative balances.

• The number of times a consumer has applied to open a bank account in the past 90 days.

These are flags for the potential for fraudulent activities such as opening and closing accounts for the purposes of writing bad checks. Some analysts also suggest that banks might use the list to weed out unprofitable banking customers such as individuals who keep low balances (which are less profitable for the bank.)

To be sure, Chexsystem helps banks combat the problem of fraud. However, innocent individuals who have not committed fraud, and may have only been guilty of inadvertently bouncing a check, or having a few overdrafts in a short period of time, can wind up essentially “blacklisted” from being able to open a bank account because they are on the ChexSystems list.

Banks decide based on their own policies and procedures when to close an individual’s account and report that fact to ChexSystems.

So, if you are having trouble getting a checking account, you do have alternatives.

David Lazurus of the LA Times reports that Citigroup Inc. is leading the way for credit card companies to impose hefty annual fees to credit card holders. Citi issues cards that did not have annual fees will now get them, under Citigroup’s new rules. Cardholders have little recourse other than closing an account to avoid the fee, unless the charge at least $2,500 a year. Just another reason why many people are better off using a prepaid card (which is not a prepaid credit card) to make purchases and track their spending.

Lazurus finds it horribly ironic that Citigroup’s CEO announced the new fees after expressing his gratitude to taxpayers for bailing out the giant bank at the peak of the financial crisis.

How Citi expressing its gratitude for that act of taxpayer generosity?

It’s slapping a $60 annual fee on many credit cards that previously had no fees and telling customers that if they don’t like it, tough patooties. They can pay off any outstanding balance and take their business elsewhere.

Man, if that’s Citi when it’s grateful, I’d hate to see the company when it’s cheesed.

We agree.