Why am I being bribed to use direct deposit?
September 27, 2007 9:03 PM
Why is my bank bribing me for using direct deposit?
So I moved & got a new checking account. When I'm setting up my account they tell me that I will eventually receive $200 or so total of bribes in actual money in my account if I keep having direct deposits put in. I have no choice but to be paid by direct deposit, so I'm getting this bribe, but I can't figure out the cui bono of it all. I know, for example, that they give me stupid useless kickbacks ($3,750 = a movie ticket) for going to the hassle of using my debit card in Credit rather than Debit mode because they make, say, $0.30 + x% per Credit transaction rather than just $0.30, but I can't figure that they're saving $200 by not having to process a couple checks each month even if I had this account for decades, unless they have some grand scheme to eliminate the paper-check-cashing machinery entirely, which seems unlikely.
The best I can figure is that they're trying to keep me on since I won't want to change all my direct deposits but it seems like a lot of money for that and I feel like there's probably some more direct benefit to them. I didn't find that they were making big money off each ACH transaction, for example.
So I moved & got a new checking account. When I'm setting up my account they tell me that I will eventually receive $200 or so total of bribes in actual money in my account if I keep having direct deposits put in. I have no choice but to be paid by direct deposit, so I'm getting this bribe, but I can't figure out the cui bono of it all. I know, for example, that they give me stupid useless kickbacks ($3,750 = a movie ticket) for going to the hassle of using my debit card in Credit rather than Debit mode because they make, say, $0.30 + x% per Credit transaction rather than just $0.30, but I can't figure that they're saving $200 by not having to process a couple checks each month even if I had this account for decades, unless they have some grand scheme to eliminate the paper-check-cashing machinery entirely, which seems unlikely.
The best I can figure is that they're trying to keep me on since I won't want to change all my direct deposits but it seems like a lot of money for that and I feel like there's probably some more direct benefit to them. I didn't find that they were making big money off each ACH transaction, for example.
Someone, I'm sure, can answer this better than me, but I always assumed it's because banks want funds immediately.
As I understand it, every dollar they in the bank (as opposed to in your hands or in the "processing" ether), they are making interest money on, so they do everything they can to hold on to every dollar for as long as they can, even in sinister ways (at least in the case of huge banks, like Bank of America), like placing unnecessary holds on checks in any situation where they can get away with it.
Since paychecks take time to process (and they have to pay someone to physically do it), direct deposit is probably much more preferable to them, since the money is wired and immediately available.
That's my guess, at least.
posted by pazazygeek at 9:10 PM on September 27, 2007
As I understand it, every dollar they in the bank (as opposed to in your hands or in the "processing" ether), they are making interest money on, so they do everything they can to hold on to every dollar for as long as they can, even in sinister ways (at least in the case of huge banks, like Bank of America), like placing unnecessary holds on checks in any situation where they can get away with it.
Since paychecks take time to process (and they have to pay someone to physically do it), direct deposit is probably much more preferable to them, since the money is wired and immediately available.
That's my guess, at least.
posted by pazazygeek at 9:10 PM on September 27, 2007
The bank my mother in law works at offers a similar program and she said the bank's incentive was that it made it a pain to switch to a competitor. The other answers make a lot of sense, too.
posted by the christopher hundreds at 9:36 PM on September 27, 2007
posted by the christopher hundreds at 9:36 PM on September 27, 2007
1. They get money quicker.
2. The per-transaction cost is less due to reduced labor.
3. When averaged out, the bank saves far more than $200 per new customer to encourage direct deposit use than they lose. You can bet it is by a big number. Luckily for you it is in your interest as well, as money hits your account faster and the bank raises its fees more slowly because they need less money to administer your account.
posted by Ironmouth at 9:37 PM on September 27, 2007
2. The per-transaction cost is less due to reduced labor.
3. When averaged out, the bank saves far more than $200 per new customer to encourage direct deposit use than they lose. You can bet it is by a big number. Luckily for you it is in your interest as well, as money hits your account faster and the bank raises its fees more slowly because they need less money to administer your account.
posted by Ironmouth at 9:37 PM on September 27, 2007
I know some people who are familiar with the financial industry and I'll try to remember to ask them about this tomorrow, but my understanding is that the benefit to the bank is twofold: it eliminates the labor cost of paying people to process the checks, but there's also ways for them to take advantage of the 'float.' E.g., there's a point where the money is in limbo, gone from your employer's account but not yet getting interest in yours; during that time the bank gets the interest.
Of course, if your bank makes the money from an incoming DD available immediately, then my theory is sunk.
posted by Kadin2048 at 9:53 PM on September 27, 2007
Of course, if your bank makes the money from an incoming DD available immediately, then my theory is sunk.
posted by Kadin2048 at 9:53 PM on September 27, 2007
I always figured that a direct deposit just meant that you were regularly adding more money to the bank's coffers, so they had every incentive to encourage you to keep on keepin' on. My checking account fee is waived because I have at least one direct deposit a month.
posted by crinklebat at 9:55 PM on September 27, 2007
posted by crinklebat at 9:55 PM on September 27, 2007
Another reason is that direct deposit is on a schedule. They prefer that because it permits them to better control over their cash float.
posted by Steven C. Den Beste at 9:56 PM on September 27, 2007
posted by Steven C. Den Beste at 9:56 PM on September 27, 2007
Christopher00's answer makes a lot of sense to me— it makes the bank more "sticky". You can't take your paycheck elsewhere and deposit or spend it; you have to move it through the bank.
And of course it reduces the bank's labor costs as well, but as you say that doesn't seem like $200 of benefit really.
posted by hattifattener at 10:06 PM on September 27, 2007
And of course it reduces the bank's labor costs as well, but as you say that doesn't seem like $200 of benefit really.
posted by hattifattener at 10:06 PM on September 27, 2007
Over time it will add up, if you stay with the bank.
posted by Steven C. Den Beste at 10:19 PM on September 27, 2007
posted by Steven C. Den Beste at 10:19 PM on September 27, 2007
The myth about banks wanting to hold onto your money for an extra day or two or three in order to earn interest keeps spreading endlessly and it is absolutely untrue.
First, retail banking derives the majority of its revenues from service charges. Loan interest being a very secondary revenue source.
Second, the bank's creditors pay interest that is almost immaterial on the most liquid of asset classes that finance your daily transactions. If it weren't for the need to compete to provide timely service, the bank really could not care less whether they pay you today or next week.
Third, it makes no sense for banks to "get your money faster" -- if you shift the entire payment schedule forward then the net effect is zero.
Fourth, the concept of "float" is patently absurd. In this day and age, government regulators would be incensed if payor funds were first floating around in some purgatory before landing in payee acounts. E-payments take time to set up but when they occur, they occur instantaneously.
It's all about improving efficiency, increasing accuracy, competing to provide faster service, cutting costs, winning / retaining business and thus increasing profits. As usual, there is no big conspiracy there!
posted by randomstriker at 10:26 PM on September 27, 2007
First, retail banking derives the majority of its revenues from service charges. Loan interest being a very secondary revenue source.
Second, the bank's creditors pay interest that is almost immaterial on the most liquid of asset classes that finance your daily transactions. If it weren't for the need to compete to provide timely service, the bank really could not care less whether they pay you today or next week.
Third, it makes no sense for banks to "get your money faster" -- if you shift the entire payment schedule forward then the net effect is zero.
Fourth, the concept of "float" is patently absurd. In this day and age, government regulators would be incensed if payor funds were first floating around in some purgatory before landing in payee acounts. E-payments take time to set up but when they occur, they occur instantaneously.
It's all about improving efficiency, increasing accuracy, competing to provide faster service, cutting costs, winning / retaining business and thus increasing profits. As usual, there is no big conspiracy there!
posted by randomstriker at 10:26 PM on September 27, 2007
retaining business
That is the one that resonates for me. The bank knows that your primary provider will be the bank that gets your pay cheque regularly. And, if you are getting direct deposit it will be harder to 'try out' a new bank. It also becomes so automatic for the customer that the thought of changing is out of mind - which creates a need for greater incentives from the competition, if they want to attract customers.
It saves cost too, of course.
posted by Chuckles at 11:00 PM on September 27, 2007
That is the one that resonates for me. The bank knows that your primary provider will be the bank that gets your pay cheque regularly. And, if you are getting direct deposit it will be harder to 'try out' a new bank. It also becomes so automatic for the customer that the thought of changing is out of mind - which creates a need for greater incentives from the competition, if they want to attract customers.
It saves cost too, of course.
posted by Chuckles at 11:00 PM on September 27, 2007
I second randomstriker's debunking of the "intermediate float" theory. That isn't the way electronic transactions are supposed to work. In fact, if they could do that, they wouldn't need to do some of the other stuff, like multi-day holds.
The reason is partly staffing, partly retention of business, but Steven is on the (uh) money -- it allows them to have greater control over their cash flow. Aggregate all their customers with direct deposit together and they have an idea what their Friday night balance is going to be. The more they have on deposit, the more they can invest to make money elsewhere. Yes, the bank does make money off your money -- by lending it to someone else, either in a loan or in a fund or some type of market. But if they have to wait for everyone to trundle in with their paper checks, they don't get that money as quickly, and some of it never shows up at all.
There may also be psychological factors involved, in that people depositing a paycheck might feel more inclined to take back some of the deposit as cash then and there. This requires the bank to have more paper money on hand, another cost, and reduces the amount they end up with on deposit.
posted by dhartung at 1:56 AM on September 28, 2007
The reason is partly staffing, partly retention of business, but Steven is on the (uh) money -- it allows them to have greater control over their cash flow. Aggregate all their customers with direct deposit together and they have an idea what their Friday night balance is going to be. The more they have on deposit, the more they can invest to make money elsewhere. Yes, the bank does make money off your money -- by lending it to someone else, either in a loan or in a fund or some type of market. But if they have to wait for everyone to trundle in with their paper checks, they don't get that money as quickly, and some of it never shows up at all.
There may also be psychological factors involved, in that people depositing a paycheck might feel more inclined to take back some of the deposit as cash then and there. This requires the bank to have more paper money on hand, another cost, and reduces the amount they end up with on deposit.
posted by dhartung at 1:56 AM on September 28, 2007
I work for a bank - the primary reason direct deposit is encouraged is because, like online bill payment, it is considered one of the "stickiest" services in the retail banking industry. Once it's set up, the majority of consumers consider it to be a huge hassle to switch it to another bank, so from the bank's perspective, it is worth compensating you in some small way to keep your banking relationship with them.
posted by ersatzkat at 4:29 AM on September 28, 2007
posted by ersatzkat at 4:29 AM on September 28, 2007
Also the $200 in bribes doesn't cost them $200, unless they're giving you cash. The $7 movie ticket they give you probably costs them almost nothing, due to cooperative adverstising agreements.
posted by electroboy at 6:32 AM on September 28, 2007
posted by electroboy at 6:32 AM on September 28, 2007
Certainly stickyness is a factor, but the big savings is less check processing. If you've ever been to a bank's check processing center, it's madness from around 4-8PM. A big bank processes millions of checks a day, and almost all of them have to have a human operator transcribe the check amount onto the check. A good operator can do maybe 100 checks a minute (if you don't get jams), but if your center gets a couple of million checks a day you're going to need a lot of people just doing that. If you print a lot of checks you can get a cheaper processing deal with the bank if you print the amount in MICR on the bottom so the bank can skip this step.
Then the checks all go to the sorting machines to record the amounts and account numbers (and photograph the checks) to get the data into the computer. Then many sorting passes to get the checks in some kind of order so they can be sent back to you (if your bank still does this) or to your bank.
posted by MtDewd at 6:33 AM on September 28, 2007
Then the checks all go to the sorting machines to record the amounts and account numbers (and photograph the checks) to get the data into the computer. Then many sorting passes to get the checks in some kind of order so they can be sent back to you (if your bank still does this) or to your bank.
posted by MtDewd at 6:33 AM on September 28, 2007
As a side note, where is my money during that float period? My Etrade account says "processing" for a full 24hours on my direct deposit each week, what are they DOING? Money was there, now money is here...what is to be processed? It's so frustrating. Why is the process not instant?
posted by lohmannn at 6:34 AM on September 28, 2007
posted by lohmannn at 6:34 AM on September 28, 2007
It's all about improving efficiency, increasing accuracy, competing to provide faster service, cutting costs, winning / retaining business and thus increasing profits.
As a recovering member of the financial industry, yes, this is true. Also, banks need to increase their deposit base because that influences how much money they can lend. Countrywide, if you noticed, had really really really good CD rates for a long time -- and that was to get money on the books so they could lend it out. Larger banks, with more on deposit can lend more money. That's why lots of small banks band together to do larger loans (sometimes you see all the names, sometimes you don't because the loans are being "participated" - the lead bank whose name you see has "sold" parts of the loan to other small banks) and it's also why large banks (BoA, Wachovia) do really large loans on their own, or do massive loans together. Direct deposit is good for the banks because it allows them to calculate in advance their deposits - if you have direct deposit, barring the fact that you quit or get fired, you will get X$ on the 15th and 30th. And that makes someone's life a little easier (ie less labor intensive, so it's a money and time saver).
By the by, when your direct deposit is sent to your bank, they get the transaction 2-3 days in advance. But it comes with a post date, and they cannot post the funds before then. So there is no "you know I have money coming, why don't you release it?" because they answer is that they can't by law.
posted by Medieval Maven at 6:54 AM on September 28, 2007
As a recovering member of the financial industry, yes, this is true. Also, banks need to increase their deposit base because that influences how much money they can lend. Countrywide, if you noticed, had really really really good CD rates for a long time -- and that was to get money on the books so they could lend it out. Larger banks, with more on deposit can lend more money. That's why lots of small banks band together to do larger loans (sometimes you see all the names, sometimes you don't because the loans are being "participated" - the lead bank whose name you see has "sold" parts of the loan to other small banks) and it's also why large banks (BoA, Wachovia) do really large loans on their own, or do massive loans together. Direct deposit is good for the banks because it allows them to calculate in advance their deposits - if you have direct deposit, barring the fact that you quit or get fired, you will get X$ on the 15th and 30th. And that makes someone's life a little easier (ie less labor intensive, so it's a money and time saver).
By the by, when your direct deposit is sent to your bank, they get the transaction 2-3 days in advance. But it comes with a post date, and they cannot post the funds before then. So there is no "you know I have money coming, why don't you release it?" because they answer is that they can't by law.
posted by Medieval Maven at 6:54 AM on September 28, 2007
hattifattener: "Christopher00's answer makes a lot of sense to me— it makes the bank more "sticky". "
This.
posted by Mr. Gunn at 8:08 AM on September 28, 2007
This.
posted by Mr. Gunn at 8:08 AM on September 28, 2007
my employer can change the account i am paid into from one payment to the next - the fact that my salary goes into an account does not make me stay with a particular bank.
what makes the relationship really sticky is direct debits...you have to get a lot of parties to change details...can be an awful lot of hassle :(
not that I would ever go back to paying people by cheque mind...life is too short!
posted by koahiatamadl at 2:19 PM on September 28, 2007
what makes the relationship really sticky is direct debits...you have to get a lot of parties to change details...can be an awful lot of hassle :(
not that I would ever go back to paying people by cheque mind...life is too short!
posted by koahiatamadl at 2:19 PM on September 28, 2007
My wife works in the Fraud Department of a national bank. She deals with line item charges/debits/credits and so forth. The thing that surprised her most was this: 90% of all unauthorized transactions are teller error. Whether it be a debit or adding a 0 to a deposit it almost always is some human's error.
Banks do not like errors and direct deposit eliminates a lot of deposit error. It also reduces the need for thme to pay more tellers.
My employer had a direct deposit "fund drive" sort of thing, if 50% of the employees that were not using DD signed up by a specific date then everyone got $100 giftcards.
As far as it being "sticky," how is it hard to change banks? You just use a simple form from your employer with the valid account numbers on it, it takes 1-2 pay periods. The forms I've seen even allowed you to easily split the amount between different acounts AND banks.
posted by M Edward at 7:42 PM on September 28, 2007
Banks do not like errors and direct deposit eliminates a lot of deposit error. It also reduces the need for thme to pay more tellers.
My employer had a direct deposit "fund drive" sort of thing, if 50% of the employees that were not using DD signed up by a specific date then everyone got $100 giftcards.
As far as it being "sticky," how is it hard to change banks? You just use a simple form from your employer with the valid account numbers on it, it takes 1-2 pay periods. The forms I've seen even allowed you to easily split the amount between different acounts AND banks.
posted by M Edward at 7:42 PM on September 28, 2007
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posted by jayder at 9:06 PM on September 27, 2007