Target made money; the bank made money. As Walters v. Target Corp. argues, consumers could be out up to $100 for even a small miscalculation. The immediate culprit appears to be lack of disclosure to consumers. The bigger story may be about the failure of government regulation to protect small short-term borrowers from predatory lending practices.
ATTENTION TARGET SHOPPERS! CODE RED ON RED CARD
Target marketed its Red Card with the promise of 5 percent savings on all Target purchases. By incentivizing consumers to use a Target Red Card over other electronic payment forms, Target saved on transaction costs associated with processing credit card or bank-issued debit card transactions.
The retailer described the card as a “debit” card. The Compaint alleges that this description is misleading because true debit cards cause an immediate withdrawal from the consumer’s checking account if sufficient funds are available. If insufficient funds are available, the purchase is declined immediately. Target delayed the processing of the transaction, often by several days, which allegedly caused customers to misestimate the balance available in their checking accounts. According to the Complaint, these RPFs were either not disclosed or insufficiently disclosed.
In addition, true debit cards, unlike the Target Red Card, come with significant consumer protections with respect to the assessment of overdraft fees. For real debit cards, banks or other issuers cannot assess overdraft fees on debit card transactions unless consumers affirmatively request that such insufficient funds transactions be paid. This is commonly known as “overdraft protection.” Target Red Cards have no such protection.
BANKS GET THE LAST BITE
Target also typically submitted the declined purchase to the customer’s bank multiple times. Eventually, the retailer usually got paid. The customer’s bank, however, often charged insufficient funds fees, as high as $29, every time the item was submitted and returned. These kinds of fees have become an increasingly important source of revenue to banks and credit unions.
PITY THE CONSUMER
Target shoppers, like consumers everywhere, have become accustomed to the convenience of shopping with debit cards rather than cash. When properly monitored, debit cards can help consumers control spending. Careful management, however, depends on the consumer’s access to information about potential fees. The gravamen of Walters is that this vital element was missing.
The settlement, which would cover all Target debit card holders in the US who have incurred at least one returned payment fee since June 29, 2012, would automatically award cash without their having to submit claims to the settlement administrator. In addition, Target has agreed that it will not charge returned payment fees for transactions under $7 and will make efforts to inform cardholders about the risk of returned payment fees or overdraft fees from their bank.
THE BIG PICTURE: FAILURE TO REGULATE SMALL SHORT-TERM CONSUMER LOANS
Who shops at Target? Almost everyone has shopped there at some point. But studies suggest that typical Target shoppers are predominantly female, white or Hispanic and between the ages of 18 and 44. They make a little more than Walmart shoppers.
Young and with enough disposable income to have a bank account, they are not payday borrowers, but not rich yet, either. This roughly tracks the demographic of those most likely to be charged bank overdraft fees.
READ MORE EXCECESSIVE OVERDRAFT FEE LEGAL NEWS
Various attempts have been made to rein in this segment of the lending industry. The Consumer Financial Protection Bureau made a brief foray into payday loan regulation, now largely undone. Efforts have also been made to require extensive disclosure and affirmative agreement on the part of consumers to the so-called “overdraft protection” feature of checking accounts.
What was new and disturbing with the Walters lawsuit, was the effort of retailers themselves to break into the low-market lending industry. The danger is that this turn of events may slip past the notice of those who watch consumer lending protection.