An overdraft occurs when the money is withdrawn from the bank account and the available balance is below zero. In this situation, the account is said " too heavy ". If there is an earlier agreement with the account provider for an overdraft, and the amount disbursed is within the official overdraft limit, then interest is usually charged at an agreed rate. If the negative balance exceeds the agreed terms, additional fees may apply and higher interest rates may apply.
Video Overdraft
Histori
The first overdraft facility was established in 1728 by Royal Bank of Scotland. Merchant William Hog had trouble balancing his books and was able to reach an agreement with a newly established bank that allowed him to withdraw money from his empty account to pay his debt before he received his payment. Thus he became the first recipient of cash credits from banks in the world. For decades, the advantages of this system, both to customers and banks, became clear, and banks throughout the UK adopted this innovation.
With the start of industrialization, new businesses need easy forms of credit to start their activities, without having to take out loans on securities they do not own. The importance of this new financial innovation is recognized by philosopher David Hume who describes it in one of his essays as "one of the smartest ideas that have been executed in trade".
Maps Overdraft
Reason for overdraft
Banks in the UK typically offer free overdraft facilities, depending on predetermined limits (formerly known as legitimate boundaries). Interest, fees or both will usually be charged if the facility is used but the account may have an interest-free buffer of a few tens of pounds or a deliberate feature higher than a few hundred pounds of interest for free.
When a transaction will exceed the previously approved rate of overdraft, the bank may elect to reject the transaction or accept it as an informal demand for an increase, previously known as an invalid overdraft. Costs and interest rates for unofficial increases will often exceed official demand. Usually there is a cost per transaction that is rejected, often subject to monthly hats. Typically, banks send letters informing customers about the charge and request that the account be operated within its limits from then on and notify customers of their new limits. In the Whistleblower BBC program in practice, it was noted that the true cost to the bank was less than two pounds.
The account exists with overdraft protection facility which ensures that the bank will not allow an informal overdraft and which may have a lower fee to refuse the transaction, protecting the customer from the interest and charges that will arise if the overdraft is given. Accounts for those under the age of eighteen will not normally allow overdrafts to be made.
Cost amount
There are no major banks in the UK that actually drop the cost of informal overdraft. Some, however, offer "buffer zones", where customers will not be charged if they exceed their limits with less than a certain amount. Other banks tend to charge irrespective of the amount of overdraft rates, which some perceive as unfair. In response to criticism, Lloyds Banking Group changed its cost structure; rather than a single monthly fee for an unauthorized overdraft, they now charge per day. They also allow a 'grace period' where you can pay the money before 2:30 pm (Mon - Fri) before any goods are returned or any bank charges incurred (with the exception of standing orders debiting at the beginning of the business day). Lloyds TSB allows their customers, if they have gone to an unplanned overdraft on Friday for example, to pay money before 10 am on Monday morning and weekly (Saturday and Sunday) weekly charges are waived. This, however, needs to be cleaned up. Alliance & amp; Leicester previously had a zone buffer facility (marketed as the "last few pound" feature of their account), but this has been withdrawn.
In general, the fees charged for unofficial requests are between twenty-five and thirty pounds, along with an increase in the interest rate of debits. Direct check and direct debit fees (or "bounces") due to insufficient funds are usually equal to or slightly less than general overdraft charges, and may be charged on them. A controversial situation is that the bank refuses checks/Direct Debit, charges a fee that keeps the customer overdrawn and then charges it because it is too much. However, some banks, such as Halifax, have a "no cost-to-fee" policy in which accounts are overstated because the cost of an unpaid item will not incur additional charges.
Legal status and controversy
In 2006, the Office of Fair Trading issued a statement concluding that credit card issuers charge a penalty when customers exceed their maximum spending limits and/or make late payments to their accounts. In that statement, the OFT recommends that credit card issuers charge a maximum of £ 12.
In its statement, the OFT believes that the fees charged by credit card issuers are analogous to the unauthorized overdraft fees charged by the bank. Many customers who spend unauthorized overdraft use this statement as a stepping stone to sue their banks to recover costs.
The Supreme Court in 2009 stated that the OFT Statement is not binding on current accounts (checking) and most solve this problem for banks.
United States
Consumer reporting and account disapproval
In the United States, some consumer reporting agencies such as ChexSystems, Early Warning Services, and TeleCheck keep track of how people manage their check accounts. The bank uses the agency to check the checking account applicants. Those who have a low debit value are denied checking the account because the bank is unable to pay the account to be revoked.
Overdraft protection in US
Overdraft protection is a financial service offered by banking institutions, especially in the United States. Overdraft protection or courtesy protection pays the items presented to a customer's account when sufficient funds are not present to cover the withdrawal amount. Overdraft protection may include ATM withdrawals, purchases made with debit cards, electronic transfers, and checks. In the case of non-pre-authorization items such as checks, or withdrawal of ACH, overdraft protection allows for these items to be paid as opposed to being returned unpaid, or bounced . However, ATM withdrawals and purchases made with a debit or check card are considered pre-authorizations and must be paid by the bank when it is presented, even if this causes an overdraft.
Ad hoc coverage
Traditionally, bank managers will see a list of banks from overdrafts on a daily basis. If managers see that preferred customers have issued an overdraft, they have the discretion to pay overdrafts to customers. Banks traditionally do not charge for this ad hoc coverage. However, it is entirely discretionary, so it is unreliable. With the advent of large-scale inter-state branch banking, traditional ad hoc coverage has virtually disappeared.
The only exception to this is the so-called "forced payment" list. At the start of each business day, branch managers often still get a list of computerized items waiting for rejection, only for accounts stored in their special branch, city or state. Generally, if a customer can come to a branch with cash or make a transfer to cover the amount of items waiting for a refusal, the manager can "force pay" for the item. In addition, if any special circumstances or items in question are from accounts held by regular customers, managers can take risks by paying for items, but these are increasingly unusual. The bank has a cut-off time when this action should be done by, because after that time, the item automatically switches from "pending rejection" to "rejected," and no further action can be taken.
Repeat credit limit
The form of overdraft protection is a contractual relationship in which the bank promises to pay overdraft up to a certain dollar limit. Consumers who want overdraft credit must complete and sign the application, after which the bank checks consumer credit and approves or rejects the application. This line of credit is a loan and must comply with the Truth in Lending Act. Like a linked account, banks typically charge a nominal fee per overdraft, and also charge interest on the outstanding balance. Some banks charge a small monthly fee regardless of whether credit lines are used. This overdraft protection form is available to consumers who meet the credit eligibility criteria set by the bank for that account. Once a credit line is established, the available credit can be seen as part of the available customer balance.
Linked accounts
Also referred to as "Transfer Overdraft Protection", a checking account may be linked to another account, such as a savings account, credit card, or line of credit. Once the link is created, when an item is presented to a checking account that will generate an overdraft, the funds are transferred from the linked account to cover the overdraft. A nominal fee is usually charged for each overdraft transfer, and if the linked account is a credit card or other credit line, the consumer may be required to pay interest based on the terms of the account.
The main difference between linked accounts and overdraft credit lines is that overdraft credits can usually only be used for overdraft protection. Separate accounts that are connected for overdraft protection are independent accounts in their own right.
Bounce protection package
Newer products offered by some banks are called "bounce protection".
Smaller banks offer plans managed by third-party companies that help banks earn additional fee income. Larger banks are less likely to offer bounce protection plans, but instead process overdrafts as disclosed in their account terms and conditions.
In either case, banks may choose to cover too many items at their discretion and charge overdraft fees, amounts that may or may not be disclosed. Unlike traditional ad hoc coverage, the decision to pay or not to pay for this excess item is done automatically and based on objective criteria such as the average customer balance, the overdraft history of the account, the number of accounts that the customer holds with the bank, and the length of time the account is opened. However, the bank does not promise to pay overdrafts even if the automatic criteria are met.
Reflection protection plans have some superficial similarities to exceed credit limits and ad hoc niche coverage, but tend to operate under different rules. As with overdraft credits, the balance of the bounce protection plan can be seen as part of the available customer balance, but the bank reserves the right to reject the payment of too long items, such as traditional ad hoc coverage. Banks usually charge a one time fee for each overdraft payment. The bank may also charge a recurring daily charge each day as long as the account has a negative balance.
Critics argue that since the funds raised to the consumer and the expected repayment, mental protection is a type of loan. Since banks are not required to contractually cover up overdrafts, "mental protection" is not governed by the Truth in the Loan Law, which prohibits certain deceptive advertisements and requires disclosure of loan terms. Historically, bounce protection can be added to consumer accounts without their permission or knowledge.
Transaction processing commands
A controversy related to overdraft costs is the order in which a bank sends a transaction to a customer's account. This is controversial because the largest to smallest processing tends to maximize an overdraft on a customer's account. This situation may arise when the account holder creates a small amount of debits that have enough funds in the account at the time of purchase. Then, the account holder makes a large debit that doubles the account (either by accident or by accident). If all items are present for payment to the account on the same day, and the bank processes the largest transaction first, multiple overdrafts may be generated. Another problem for consumers may occur when large deposits and greater discharges occur on the same day; for example, a customer with $ 700 in their account depositing a $ 600 salary and then paying $ 800 on the same day would incur an overdraft charge, despite having more than enough money in their account to cover the check.
The largest "first check" policy is common among large US banks. The Bank believes that this is done to prevent the most important customer transactions (such as rent or mortgage checks, or utility payments) from unpaid returns, even though some of the transactions are guaranteed. Consumers have tried to file lawsuits to prevent this practice, arguing that banks use the "biggest check first" to manipulate the order of transactions to artificially trigger more overdraft fees to be collected. Banks in the United States are largely governed by the Office of the Financial Supervisory Currency, a Federal agency, which formally approves the practice; However, this practice has been opposed, under many individual country practice deceit laws. In class action, the US Bank Corporation entered into a $ 55,000,000 settlement agreement on January 16, 2014 on the transaction's highest (transaction low) transaction practice of posting a debit card transaction to a customer account and the alleged order posting effect on the overdraft fee amount charged to the account holder.
Bank deposit agreements usually specify that banks may remove transactions in any order, at the discretion of the bank.
Opt-in Rules
In July 2010, the Federal Reserve adopted a regulation (revision of Rule E) which prohibits overdraft costs generated from a single debit card and ATM transactions unless a bank customer has chosen to overdraft protection. Consumers choosing to participate in overdraft programs pay more than seven times in overdraft and NSF fees, averaging nearly $ 260 per year, according to a recent report from the U.S. Consumer Financial Protection Bureau. A study by the Moebs Service released in February 2011 shows that as many as 90% of customers have chosen overdraft protection so the projection that US banks will record a record profit from overdraft costs.
Alternative for overdraft protection
Fintech's innovation has resulted in a viable alternative to overdraft costs.
References
Source of the article : Wikipedia
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