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What the banks know about you (but won't tell you) and why it matters

Third-party databases, similar to credit bureaus, are keeping track of overdraft information and creating debit scores, which can be used to deny checking accounts.

By HELEN HUNTLEY
Published July 17, 2005

Think nobody but the grocery store knows about the bad checks it has to eat?

Think only the bank remembers overdrawn accounts left behind when customers move?

Think again.

Companies that operate private data banks are tracking your banking behavior - and most banks and retailers are happy to tell them when you slip up.

One company even crunches the details into a debit score. It's like a credit score, but instead of getting you turned down for a credit card, a low score might mean you can't open a checking account. And, unlike the credit score, you're not allowed to know your debit score.

Systems for tracking consumer financial behavior are getting more sophisticated all the time. The debit score is a product of eFunds Corp., one of several companies monitoring your banking and check-writing habits. Its ChexSystems unit provides instant account screening services to 8,800 banks with 100,000 locations, representing about 80 percent of the industry.

The point is to reduce bad check losses, a $30-billion problem for banks last year. The downside is that consumers who end up blacklisted by ChexSystems can have difficulty opening an account for up to five years.

And, as is the case with credit bureau data, correcting inaccurate banking information can be a lengthy process. (See related column about my experience.) Under federal law, consumers have the right to one free report a year from consumer reporting agencies such as ChexSystems, but most aren't aware ChexSystems exists until they've been denied a bank account.

The problems have spawned a second-chance consumer education program, coming to the Tampa Bay area this fall, and a mini-industry of Internet entrepreneurs selling lists of banks reputed not to use ChexSystems for screening.

ChexSystems was created to stem losses from bad checks, and that's still its primary function.

"The company was started in 1971 when a grocer in Minnesota got tired of taking bounced checks," spokesman Joshua Turnbull said. "When banks closed accounts, they would report who they were forcibly closing. It would be typed on index cards."

Today, information that banks report about their customers is socked away in eFunds' debit bureau, a huge computer database that also supports the company's Shared Check Authorization Network, known as SCAN, which provides check verification services to retailers. The company that's over all of it, eFunds, was spun off from the check company Deluxe Corp. five years ago and is in Scottsdale, Ariz.

Details about bank accounts and bad checks are at the heart of the debit bureau files, but they aren't the only information it collects.

"We've gone from the early days of files of only negative information to rich consumer profiles on millions of consumers," Turnbull said.

The debit score is a newer product that consumers can't see unless a bank that ordered it decides to show it to them. A company that uses eFunds' debit scores said they range from 1 to 999, the higher the better.

Turnbull declined to provide many details on the scores or their calculation, but said more than 400 "attributes" are considered. It's not just whether you wrote a bad check, but how quickly you made good on it, he said.

The cardinal sin in ChexSystems' world is to owe a bank money. Banks report customers to ChexSystems for overdrafts as small as $36, typically after giving a customer 45 days to pay, according to a survey four years ago by the National Community Reinvestment Coalition.

Even if the bank is eventually paid, the negative notation stays on a customer's ChexSystem record for five years. By contrast, debts to retailers as a result of bad checks are typically removed from databases shortly after they are paid.

The coalition said its survey found that most banks rejected customers who had any negative information in ChexSystems and failed to consider an account applicant's employment history, rent payment history or other variables.

The nonprofit coalition, which aims to direct private capital to "under-served communities," said it found no overt discrimination. But it said "benign neglect appears to be resulting in thousands, if not hundreds of thousands, of consumers shunted unnecessarily into the fringe-banking world of stiff fees and high interest rates."

It recommended that banks become more flexible in their use of ChexSystems information.

Banks vary widely in their practices. ChexSystems' Turnbull said, "Some banks say, "If you've paid the debt, we're fine; we'll open an account for you.' Other banks will say, "If it's two years or older, fine.' Others will say, "If it's on there, we won't open an account.' "

The banks are secretive about how they use ChexSystems.

"If I tell you, you'll tell people with bad credit and we don't want them to know," said Susie Findell, spokeswoman for SunTrust Banks.

People who are blacklisted by ChexSystems often complain that the process was unfair, citing issues such as incorrect payment processing that led to the overdraft or a change of address that delayed their finding out they owed the bank money. Others are confused about what happened.

"We deal with a lot of limited-resource people who have had checkered credit and financial histories," said Jeanette Tucker, an economics professor at Louisiana State University AgCenter in Baton Rouge. "All they know is they're mad. They can't get an account and it's the bank's fault."

Federal Reserve statistics show 13 percent of U.S. families don't have a checking account. When asked why, about half said they didn't need one, didn't have enough money or didn't write enough checks to make it worthwhile. Most of the rest cited bank-related problems, including "do not like dealing with banks" and "cannot manage or balance a checking account."

Being denied a bank account can have costly consequences. Several studies have shown that consumers with modest incomes and no bank accounts spend several hundred dollars a year on check-cashing fees.

"They may pay 15 percent of the face amount to get it cashed and if they have bills to pay, they have to buy money orders or cashier's checks," said Richard Schram, spokesman for the Consumer Credit Counseling Service of Central Florida and the Florida Gulf Coast. "And it's dangerous too for people to be carrying cash around in their pockets."

Tampa Bay consumers who are in ChexSystems' bad graces soon will have an opportunity for a fresh start by completing a consumer education program. The consumer credit counseling service is part of a group of nonprofit organizations and financial institutions working with ChexSystems to bring the national program, called Get Checking, to the Tampa Bay area. It is a six-hour consumer finance course that will be offered in various locations starting in September or October. Cost will be $40 for an individual or $60 for a couple. Many institutions offer checking accounts to graduates.

ChexSystems isn't the only company maintaining a database on consumers' banking behavior. Other companies keep extensive files they use to screen retail transactions for signs of fraud.

For example, Certegy Inc., a St. Petersburg company, has a database of "100-million good check writers," spokeswoman Mary Waggoner said. "Retailers transmit data to us and we run it through models." Certegy tracks what consumers buy with their checks and where they buy it. Waggoner said the system can flag questionable transactions such as a consumer buying the same items at two electronics stores.

"We don't let someone else tap into our file to get information on a specific customer," she said.

However, other transaction-screening companies, such as TeleCheck, Checkfax and SCAN, share bad-check information with banks by screening applicants for new accounts. The fast way out of those files is to pay off the debt.

Depending on how the information is used, companies might fall under the Fair Credit Reporting Act and be required to provide a free annual report to consumers in their files.

Debit scores are used to grant financial services and deny them. Experian, one of the three large credit bureaus, provides debit scores from eFunds to lenders who want a more thorough report on a potential customer.

"If a person doesn't have a credit history or has a thin credit history, this gives the lender something on which to base their decision," Experian spokesman Rod Griffin said. "It helps the emerging consumer."

The expansion of bank information databases offers a classic conflict between data users who want to reduce their risks and consumers who are put at risk by information that's negative or misused.

"Banks obviously collect lots of information about their customers and to some degree they need to," said University of Texas law professor Ronald Mann, who specializes in electronic payment systems. "Banks have a strong and legitimate interest in following things like the pattern of payment transactions to prevent people from stealing money. The difficulty is it's troubling to people when the information gets spread."

A case in point is the data breach at ChoicePoint, which revealed this year that scam artists had managed to get access to personal information on 145,000 people in ChoicePoint's files. The Atlanta-area company sells services such as verifying identification and credentials and tracking insurance claims.

"We're at a crossroads now in a way," Mann said. "As people collect more information there are some benefits in making things run more smoothly, but now we see something of the potential costs to all of us."

Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.

[Last modified July 15, 2005, 22:35:03]