Tuesday, December 12, 2006

Electronic Bill Payments: Do I Smell A Class Action?

So maybe someone with more expertise in finance can answer this question for me:

Most banks now offer you the ability to make a "free" online bill payment. This payment is either wired electronically (if your payee has an electronic fund transfer set up) or the payee is sent a paper check in the mail automatically generated by my bank. While this is a great addition to an otherwise backward and stagnant banking industry, I've started to realize that it has some significant--perhaps actionable--drawbacks.

What I've noticed is this: as soon as you "send" the bill payment, that amount is deducted from my account balance immediately--that is, regardless of whether the payee cashes the check or not.

So for example, if I make a bill payment to my brother in NY for $1,200.00 on Jan 1, 2007, my account will be debited $1,200.00 that same day. It might take my bank three or four days to process it and send it out, and another two or three days for the check to get through the mail. On top of that, my brother might not have time to cash the check for a few weeks because he's busy. Let's say my brother cashes the check on Jan 21. This is when my account balance should be debited 1,200.00, not as early as Jan 1.

I'm sure the bank will try to give me certain party lines. They might say that the automatic deduction makes me less likely to bounce a check because it is now "easier" or "more convenient" to keep track of my account balance without having to worry about what checks of mine are floating out there. There are two responses to this: (1) I could always--gasp--write it down and balance my own checkbook like an adult; or (2) if you really wanted to make it more convenient for me, add another column on my account balance, one that shows my actual balance and one that shows my balance adjusted for outstanding bill payments yet to be cashed.

The bottom line is this: what my bank is really doing here is depriving me of interest that my $1,200.00 would earn between Jan 1 and Jan 21. If you add this up for the millions of bill payments, a bank could be saving millions on interest payments that are actually due to account holders.

So if there are any entrepreneurial class action attorneys out there--call me, I'm game.


A.H. Rajani said...

So I went to Citibank and asked them about it. I spoke to two bank tellers and one of those dudes that sits behind a desk.

They confirmed that I did not, in fact, receive any interest as of the day the bill payment is "sent," which in my example would be Jan 1.

I asked them why I wasn't earning interest on money that hasn't been deposited in anyone's account, and they all insisted that, "they" already had the money and were just waiting to cash it.

Who the hell is "they"? The staff said the payee to whom the bill is sent. so let me get this straight, they're saying that my brother already "has" 1,200.00 but just hasn't cashed the check yet? Yea nice try, neither my brother nor his bank have any idea that a check was written to them until the day he deposits it.

So here's the million dollar question (multi-million if there's punitive damages . . .): who has control of my money in between Jan 1 and Jan 21? If it is deducted from my account (and the staff at the bank said that Citibank no longer has the money once the bill is "sent"), then where is the money held in limbo before my brother cashes it?

My best guess is that Citi funnels it into a "temporary" account so that I can't earn interest on it. Yet Citi still has the benefit of investing that money. Even if the bill payments in aggregate were saving Citi just pennies in interest payments, this can add up very very fast (See Office Space).

Chris said...

Interesting question. I do my online bill pay with HSBC, and while I am not positive about when the money flows out of my HSBC account, I know it is not immediate.

(HSBC does not have locations in Seattle, so I do all of my day-to-day banking with Washington Mutual. Twice a month, though, I log onto HSBC and transfer funds from WaMu into HSBC (the transfer is free on both ends, and HSBC offers that absurd 5.05 percent interest rate), and once a month I log on and pay my bills).

Next time, I'll check how quickly the bill balances are deducted from my account.

A.H. Rajani said...

chris, I have HSBC too and they do the same thing.

I make transfers through HSBC, but that's different. It is no immediate and usually takes 1-2 business days, and the money is deducted at the time it is transferred to your other institution (which is the way it should be)

But if you make a bill payment, there is a built in delay in that you can't send a bill payment out the same day. Usually there is a waiting period of 1 to 4 days depending on the bank.

So, say it's Jan 1 and i want to mail a payment. HSBC will say that it can't schedule a payment until Jan 3. On Jan 3 it will begin processing and probably within a business day or two, it will physically send the check out via snail-mail. In this scenario, my account will be debited on Jan 3, not Jan 1 because that is the day the payment was "processed."

Then it is up to whoever i want to pay to cash the check into their account. Thus, even with the built in "lag" the deduction in my account still takes place way too early.

Anonymous said...

Hey, I'm just a 1L, so what do I know? I haven't even taken contracts yet, but I am guessing that this boils down to a contract issue. You've probably already agreed to letting the bank do this to you in the fine print. But if you do manage to get some traction with this idea, good luck.

Unknown said...

I paid a contractor electronically. The bank immediately deducted money from my account. Because the contractor needed immediate payment, he called and asked for cash instead. So—I paid him directly and told him to rip up the check when it arrived in the mail.
Lo and behold, my bank nonetheless withdrew the money and would have never put it back into my account unless I called, apparently.
What happens to all money for the uncashed checks out there? I only noticed this SEVERAL MONTHS LATER and asked for a refund. How do I know that there aren't other uncashed checks out there that the bank has deducted from my account? And how can I keep an accurate record for the IRS??