by Danny Burstein
“Direct Deposit” is a handy way, and in many cases the only way, of getting salary and other payments into your bank accounts.
For the recipient, it has the advantages of being automatically handled “behind the scenes” with no trip to the bank needed.
And many financial institutions encourage the process by, for example, tying it in with “free checking” and other benefits. (But note that one of the biggest banks, Citicorp, will be ending that nicety come next year).
Both the paying agents (the company/gov’t/retirement service) and the receiving destinations prefer it because it reduces paperwork and personnel costs.
In general it’s a “win win” for just about everyone involved. Until things go wrong. Go wrong. Go wrong.
What the banks, non bank banks, and non bank non banks don’t tell you is that, just like money can be transferred into your account, it can also be pulled from there.
And for over 50,000 retirees of NYC’s United Federation of Teachers, t’was a rude awakening.
Per the UFT website and contemporary news reports:
“Some 53,000 UFT retirees had their monthly pension checks abruptly withdrawn from their accounts on Nov. 6, causing all sorts of distress for those counting on the money. The Bank of New York Mellon, a global financial services company that handles Teachers’ Retirement System deposits, ‘reversed’ $189 million in October pension checks that it had put in 64,000 retirees’ accounts by direct deposit just days before.”
Getting bank officials to talk on the record about this issue s just about impossible. But as one colleague who prefers to be identified as “an independent computer programming consultant with a bit of experience working with Very Large Financial Institutions” puts it, “once you ‘offer the keys’ to a bank account to another organization via direct deposit you cannot ‘change the lock’ without closing that particular account and opening another one.”
This source added that the only difference between a direct deposit and a clawback is “the arithmetic sign of the amount being applied to the account. For simplicity’s sake: a negative deposit is the same as a withdrawal, a negative withdrawal is the same as a deposit.”
Even worse from a safety standpoint is that, under the standard automated clearing house” (“ACH”) interbank arrangements, there’s very little to stop ANY validated member from grabbing money from your account.
This works fine if, for example, you’ve authorized the local utility to dip in to pay your monthly telephone bill. But there are cases aplenty of such groups continuing to stick their fingers into accounts after the service was canceled.
And while it’s fine for your local supermarket to take that “check” you hand the cashier and convert it into an immediate electronic debit (eliminating, alas, any “float” you’ve been accustomed to), there’s very little to stop that supermarket from re-entering that request two months from now.
There are numerous safeguards in the systems, so, for example, a car dealer in Nigeria can’t dip into 5,000 accounts at Mid-City Bank and Trust, but there are also, by necessity, any paths under the “fraud radar.”
The best option is to find a bank that won’t allow any “pulls” on your account. But good luck on finding one. When I asked around, not one of the half dozen institutions spoke with said they could guarantee it.
Sending a note to your bank ahead of time reminding them that you don’t authorize these withdrawals won’t stop them, but it’ll help in recovery.
And that’s the next issue: Namely, how do you get the money back?
In this case, with 50,000 dips, the Bank of New York Mellon quickly acknowledged its error and redeposited the funds within a few days. They also agreed to cover any additional costs to the depositers, such as bounced checks.
This still left people with hours of problems and embarrassments. And no doubt, there were people who ran into secondary issues such as, for example, having insurance policies that hiccuped when the payments bounced.
The bigger problem is that the entire process is based on trust in the system. And, it seems, there’s no choice these days to opt out of it. Few if any banks will put an electronic wall up on your account. And while a clear case like this will get restored quickly, trying to fix an “extra” bill from,say, a cellular company that’s been authorized to bill for the past five years will cause lots of grief.
The best ways to keep your account secure from a crippling blow are the obvious ones. The first is to separate out your savings into different accounts and institutions. The second is to keep a sharp eye out for any unexpected draw-downs.
And, it wouldn’t hurt to send a note to your bank asking them for their policy on automatic draw-downs.
The United Federation of Teachers:
The Bank of NY Mellon: