Keep the change

Keep the change... When people say this, it is usually implied that they are giving you a financial benefit, a tip. So Bank of America's "keep the change" program is just that, a financial benefit... right?

Consumers probably like this program because that is exactly what Bank of America is doing, right? With every single transaction you make, they are putting money into an interest bearing account for you. In case you don't know, let me explain how this works. You make a transaction of $2.05. They charge your account $3 and move the extra $0.95 from your checking (where the money from your debit card transactions is deducted) to your savings (where you earn, on a "regular savings" account, 0.10% interest). Now, for the first three months after you enroll in this program, BoA will match that $0.95 100% (in other words, they put in an additional $0.95 for you). After those first three months, they match at 5% ($0.0475). Okay, so they are putting some of their own money into your account, so this is a great program, right?

Consider this: if you overdraw your account, they hit you with a fee that isn't exactly straightforward, but can range from $10 to $40 it seems.

In that light, let us reappraise the situation. Let us say that you only have $5.99 in your account and you make a transaction for $5.01. They will "help you save" by rounding that transaction up to $6 and transfer $0.99 into your account and they will put in another $0.99 or $0.0495 into your account for you. So that means you just gained, at best, $1.98 in your savings account bearing 0.10% annually... good for you. In doing this, you just overdrafted your account which, unfortunately, means that you just got charged $10 (if I understood their policy correctly). So for the cost of, at most, $0.99, Bank of America is earning $10 -- on this simple transaction where you should have still have $0.89 in your account, you lose $10 and Bank of America, by "helping you save," makes $9.01 or $9.9525 in profit!

The lesson here is that banks make a lot more money off of retail transaction (you and me) through fees than service charges. You should always consider the effects of actions others automatically make on your behalf, especially when the other party stands to benefit from these transactions.