Banks are wiggling their way into consumer pockets in any way they can. Take money out of an ATM one gets charged (sometimes both by the releasing bank and one’s own bank.) Miss an average minimum balance or order a statement or cancel a check, one often has to pay. But, the most devastating fees are often the overdraft fees.

To maximize overdraft fees, banks have the keen rule to process the largest transaction first and work backwards. So, one may over draft numerous times with outstanding checks. Overdraft protection must be asked by the consumer and often requires maintenance of another account of additional fees so fewer consumers have it. The median overdraft fee is $27 while the average is $17. However, on Monday 4/5/2011 Citi Bank announced a reversal of the largest to smallest policy effective 7/25/2011.

To illustrate the difference in effect, suppose one has $1,250 in their account. Now suppose that consumer writes a rent check for $1,200, cable payment check of $75, cell phone check for $110 and electric utility check of $90. Granted that consumer should have been aware that they were beyond their means, but in this newer hand to mouth economy, these things happen.

With the above example, banks would usually do the following (if all checks were cashed on the same day):

Customary bank with old rule:

Beginning Balance: $1,250

Less: $1,200

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Subtotal 1: $50

Less: $110 (overdraft)

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Subtotal 2: -$60

Less: $90 (overdraft)

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Subtotal 3: -$150

Less: $75 (overdraft)

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Total: -$225

Note that there are three overdrafts, resulting in an average extra cost to the consumer of $51.

Using the same scenario, but with the smallest to largest transaction that Citi will begin implementing we see the situation much more manageable.

Beginning Balance: $1,250

Less: $75

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Subtotal 1: $1,125

Less: $90

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Subtotal 2: $1,035

Less: $110

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Subtotal 3: $925

Less: $1,200 (overdraft)

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Total: -$275

The consumer still has a negative balance of $225, but was only subjected to one overdraft – costing $17, not 3 costing $51.

The rationale of the banks is that the larger transactions are more important (i.e. mortgage payments, insurance payments, etc.) At this time Citi is a forerunner, with no one chasing them. Bank of America and Chase, at this time have no plans to change their protocol. This is a small victory, but is proving that elephants can learn how to dance.

This article from earlier this year discussed giftsforbanking, a CD offering that provides presents in lieu of a higher CD yield, and Bankdirect, a Texas-based bank that offers American Airlines miles in lieu of interest on savings accounts. The article concluded that while American Airlines miles may be a good substitute for cash interest in the current environment, the gifts on giftsforbanking won’t make up for your lost interest over the life of the CD.

Those people who live in areas where JP Morgan Chase has a heavy presence have become accustomed to receiving offers in the mail to earn between $100 and $150 in cash for opening a Chase savings or checking account. These offers ordinarily require maintaining a $10,000 balance and maintaining it for over 6 months. Since $10,000 isn’t going to earn $150 in interest this year, the opportunity to make that kind of money in six months may be attractive if you are willing to spend a few minutes sitting with a Chase banker in a branch. Find the closest JP Morgan Chase branch to where you live.

Likewise, HSBC is offering new Premier account holders who deposit $100,000 a $500 bonus. That’s a 0.5% return just from the bonus. Find the closest HSBC branch to where you live.

Online brokerages have also gotten into the act too, and have now become perhaps the most aggressive gift-givers. This author has received Apple and Home Depot gift cards, as well as United frequent flier miles and Starwood points, for moving equities and cash to TD Ameritrade.

TD Ameritrade recently caught my attention and clearly raised the promotion bar by sending out a glossy brochure offering free 8-day cruises for two to Alaska, the Mediterranean or the Caribbean. My own excitement dissipated when I reached page 4 and discovered that the Alaska cruise requires a $5 million cash or equity deposit, the Mediterranean cruise $2 million and the Caribbean cruise $1 million.

Earlier TD Ameritrade promotions requiring smaller deposits have worked well for me. While I don’t have the type of assets sitting around to take advantage of the cruise promotions, this glossy brochure did strike me as a very unique effort by a discount brokerage aimed at winning higher net worth investors from the major non-discount investment houses.

Nevertheless, I would warn any higher net worth investor that these promotions only work if you are entirely self-directed and are using the account mainly as place to park cash or securities. Particularly, in my own experience, TD Ameritrade has proven to be technically challenged – their execution system often malfunctions and their website is often unavailable. High net worth investors may rue the day that they jumped on a cruise after spending 15 minutes on hold trying to figure out whether they are in or out of a trade.

Businesses around the country, particularly small businesses, are being charged excessive fees for accepting credit cards, according to Senator Dick Durbin of Illinois. He assets that so-called interchange fees are passed onto consumers in the form of higher prices, and as a result consumers are paying the ultimate burden of these so called interchange fees which total $50 billion in the US in 2008.

Visa and MasterCard require an interchange fee of one to three percent of the transaction amount to be paid every time someone uses a debit or credit card. Through arrangements with member banks, these companies then deliver the interchange fees to member banks with approximately 80% of the money winding up in the hands of the 10 largest US banks.

Senator Dick Durbin claims that American consumers and retailers are being nickled and dimed to the benefit of big banks. The current interchange system, according to Durbin, is effectively a hidden tax eating away at those consumers and retailers who have already been left with the burden of bailing out the large banks after 2008.

An open market economy provides that the credit card companies and the banks should be allowed a fair return for facilitating payment (and, perhaps extending credit). It is very clearly demonstrated that consumers spend more money when they have a credit or debit card than they would with cash or with a check, thus leaving most small business no choice but to accept credit card payments.

Nevertheless Durbin asserts that the fees are not fairly and transparently negotiated. Rather, he claims that the terms are currently given to merchants on a “take-it or leave-it basis”. Durbin’s proposed amendments to the Wall Street reform bill, would direct the Federal Reserve to ensure that debit card interchange fees be "reasonable and proportional" to the costs incurred in processing the transaction. The legislation would also strip anti-competitive provisions from Visa and MasterCard's contracts. Durbin asserts that in a normal market following his amendment, banks would compete with one another to win merchant business.

What do you think? Should the Durbin Amendment be passed to lower transaction costs for small businesses with the savings potentially being passed on to consumers? Or, do you feel that the credit card companies and banks get a fair return for the credit card and debit card services that they provide and should not be hampered by the federal government?