Unbeknownst to you, and for almost a decade in some cases, the banks have been playing a little game behind the scenes. It just so happens that the game that’s being played is with your money.
It was August, 2010 when the stuff kinda hit the fan as they say. That’s when Wells Fargo had to shell out $203 million after losing a lawsuit over their deceptive overdraft fee policies. It’s a little known trick called reordering or high-to-low resequencing. It basically means that a bank will settle out each day by ordering each of the transactions in a descending order from largest transaction to smallest. It may not be a big deal, but what if you became overdrawn on your account?
You were out and about on a beautiful Saturday afternoon and bought lunch, grabbed some snacks, picked up a new shirt for work, saw a great deal on some shoes, and then capped it all off with a cappuccino/latte/espresso (as expressed by a non-coffee drinker who prefers his caffeine in the form of multiple diet cokes). But that was all in preparation for buying that new 50 inch plasma TV that’s on sale at Best Buy. You know payday is on Monday and your account is a little tight, but even if the purchase at Best Buy puts you a couple hundred bucks in the red you figure the overdraft charge is only $35 plus you get paid on Monday…heck, it’s the weekend and maybe you won’t even get hit with the $35 fee.
Well, think again. Try $35 x 6 for a total of $210 in fees! It’s because the bank calculated the largest transaction (the plasma TV) first and then all those other transactions – even though they happened sooner – after the large transaction so by their calculations every transaction that day was subject to a $35 overdraft fee.
The Wells Fargo decision by Judge William Alsup got additional attention simply because of how outspoken Alsup was. He called the Wells Fargo practices “gouging and profiteering.” He didn’t stop there and went on to say:
“Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole motive was to maximize the number of overdrafts.”
Then we’ve seen other banks settle class-action lawsuits like Bank of America who settled in Nov. 2011 for $410 million on this overdraft issue and Chase in Feb. 2012 for $110 million. Eileen Smith covered the topic well in a recent article about TD Bank’s charges.
In fact, here’s a list of banks currently involved in lawsuits over excessive overdraft fees. There’s a decent chance your bank is on the list. Of course, the penalties are basically a slap on the wrist when you consider the profits that have been made on overdraft fees. It’s estimated by the Consumer Financial Protection Bureau (CFPB) that banks made between $15 billion and $22 billion in 2011 from overdraft fees. That’s down from much higher estimates in previous years. According to American Banker, Chase made $500 million a year in post-tax income from high-to-low resequencing.
How would you feel if your financial planner or accountant treated you and your money like this? You would leave him/her in a heartbeat and never let someone like that manage your money again…and why is this behavior from a bank somehow acceptable?
So where are we now with all of this? It’s a good question. There are obviously many class-action lawsuits in the works and the practice of reordering debits or high-to-low resequencing has been illegal since July, 2011. The CFPB announced in late Feb that they are investigating banks’ deceptive overdraft practices. I’m sure the banks will find other ways to generate that precious fee income and they’ve obviously been exploring with ideas already as we’ve all been hearing about.
It may be time to join the growing army of small businesses who are leaving the big banks for smaller banks and credit unions.
Banker Photo via Shutterstock
This is typical behavior when incentives are misaligned. The bank is publicly traded and therefore has a fiduciary responsibility to shareholders to maximize profit. Overdraft fees represented a lucrative source of profits and the bank made their decision based on their responsibility to maximize profit. That’s why credit unions are growing in popularity, they eliminate the profit-maximization incentive and make decisions with the customer as a focus.
Tom Gazaway
Robert,
You may not be “wrong” but I’m not in favor of anything that takes advantage of a person or group in the name of profit. No matter how you slice this one it’s sneaky, unethical, and wrong.
Nathalia Morales
Not news, these crooks have no shame. Now, are there smaller banks and credit unions that you can recommend? I’ll be joining soon the growing army… I’m tired of banks, bankers, greedy crooks.
Tom Gazaway
Nathalia,
I don’t have a specific list of smaller banks and obviously that would be dependant on your geography. Best of luck Nathalia.
Gerald Meloni, CPA
This has long been a sore spot with me, especially since the ones that can least afford to be hit with fees are the ones that suffer. I just spoke to my banker today from one of the big banks, and he told me that there are now banking regulations that now require these items to be paid in the order they are presented. But that does not really solve the problem, does it? Also, many low income bank clients can’t qualify for overdraft protection in the form of a credit card or small line of credit. All one would need in most cases is a $1,000 line of credit, but the banks require a minimum of $5,000, and because many of these people have poor credit, that’s an option that is not available to them. Any large corporation that victimizes the poor for profit is guilty of the worst kind of greed.
Tom Gazaway
Thanks for your comments Gerald. Well said. You’re exactly correct, though. An extremely high percentage of the overdraft charges are from younger people and also they tend to often be repeat offenders too. Nothing pretty about this one from any angle you look at it. It’s one thing for a company to always be looking to maximize profits but it’s another thing altogether to take advantage of people for a buck – or in this case billions of bucks.
Nick
The order checks are paid is was originally determined by customer desire. Which checks are most important to be paid? Now you have created a situation where your house payment will be returned because you had a cup of coffee. The payment on that big screen TV will be rejected because you bought a pair of shoes earlier in the day.
You have oversimplified the issues, and created the big bad bank. But the reality is that this is an item that is totally controllable by the consumer. Don’t spend it if you don’t have it.
Tom Gazaway
Nick,
I certainly appreciate your comments. However, we’re not talking about payments that are rejected. We’re talking about the banks using a system, without any approval from their customers, that charges an excessive number of overdraft charges. So this is about only incurring the proper number of overdraft charges and not an excessive amount of them. I would definitely agree that there’s not enough room to cover this in great detail and I would also agree with the fact that the consumer has some responsibility if they spend more than what’s available to them. But is it really okay to reorder the transactions with the sole purpose of charging more in fees?
Chris
Tom, I’m surprised at you! You tell your customers what you will charge if you do something, then you do it, charge your price and make a-gasp-profit! How dare you! Look, I know this is the century that we pick on big bad banks. But c’mon, really? Bank’s disclose EXACTLY what their fees are and how they will be charged, then they charge it. Just because some lawyer gets a class action going doesn’t mean anything, plus we all know that the LAWYER makes 1/3 of the settlement, and the hundreds or thousands split the rest for a pittance. (Gee, Tom, why don’t you write about THAT!). Credit Unions are great, but surely you must be aware Tom that they cannot offer near the business services that most banks can to help that business thrive. Also, they pay zero nada 0 taxes. Finally, remember that NO one gets charged an overdraft fee if they don’t spend money that they don’t have. NO ONE.
Tom Gazaway
Chris,
Thanks so much for your perspective. We don’t have much if we can only talk about one perspective! But, c’mon Chris…we’re not talking about the fact that the bank shouldn’t get a fee for paying for a transaction when the funds weren’t there. They should get their $35 fee (or whatever they charge for overdrafts). Are you really okay with them reordering the transactions for the sole purpose of charging additional – and many times excessive – fees for what should be a transaction or two normally? Also, I totally agree with you that the credit unions normally do not offer the level of services that are needed for a small business. I’m not going to argue that one at all but I do think that the only way the banks will get a message from us that this kind of behavior is unacceptable is if we move our deposits. Thanks again Chris for your comments.
Keoney Nova
Regions bank has been doing this for years. I couldn’t believe it when I first realized that they were deliberately holding smaller purchases in order to charge bounce fees on every transaction. Of course this isn’t a big deal if you carry a large amount of money in your account and never bounce anything. But for the rest of us, it can be quite devastating.
I was using the Regions as a second/backup account, as my main account is with a credit union. But I ended up “owing” Regions three times what I deposited every month because of fees and fines. I finally just killed the deposit I had going to the account because I was literally throwing my money into a black hole. I’m too afraid to even know what I now “owe” them. I’m sure they’ve posted as many fees and fines as possible. I feel completely helpless about this situation but I do find a small comfort in the fact that it is recognized here. Whenever I talked about this before, I felt as though people just assumed I was being paranoid and irresponsible.
Is there any recourse for the rest of us?
Chris
Yes, there is recourse: don’t bounce checks. Sounds like you are a serial bouncer. You are very lucky they didn’t get rid of you first. Anyway, I just don’t get it-the bank PAYS your checks, even though you don’t have enough money, and you say thank you by taking your business elsewhere. Nice.
Keoney Nova
OMG…why didn’t I think of that /slaps forehead you, sir, are brilliant. While I’m at it, I’ll just raise my income too. I feel so silly ^_^
Seriously, I’m not blaming ANYONE but myself for bouncing my account, nor am I complaining about paying A FEE when I DO bounce. But that’s NOT what this is about. You guys need to read and comprehend before making comments.
I suppose Tom should have made some slides to illustrate this better. For those of you who never overdraft and live comfortably, hey that’s great. I used to be one of you. Life happens and things change in a heartbeat.
Regardless, it’s no excuse for banks to take advantage of “financially challenged” people. What they’re doing is not right and just because it doesn’t affect you, doesn’t mean it’s not a problem. Simply saying “So don’t overdraw your account” is not acceptable.
In my case, this is debit card transactions, not just willy nilly writing checks I can’t cash. In this day and age, shouldn’t debit card transactions be nearly instant? They are at my credit union, but at Regions? Not so much.
I realize this concept is foreign to some of you, but say I only have $20 in my account. My kid needs school supplies. Cool. I go to dollar tree on Tuesday and get him what he needs for $8. Crap, we’re out of bread and milk so I swipe again at the grocery store for $5. Ugh he ripped his one good polo shirt that he’s required to wear to school. Another $5 at wal-mart. No problem, right? That’s $18, but I started with $20, so I’m good. Everything’s covered…
Except on Thursday I get in the car and I’m out of gas. I don’t get paid until the next day. Well I have to get to work, so I make the decision to swipe the card for gas and I’ll just pay the bounce fee.
Unbeknownst to me, NONE of Tuesday’s transactions have cleared. They’re just sitting there. I put $40 in the tank and only THEN does Regions decide to wake up. Of course, they bounce the gas first, then they go back to Tuesday and say “hey dummy, you bought all this stuff and didn’t have any money! hahaha!” and they bounce all those and charge $35 for each one.
So someone tell me why my Tuesday transactions didn’t clear until after the gas on Thursday? I had the money to cover those at the time the purchases were made. Why? Because it behooves the bank to wait a few days and see if they can’t rape me for every possible dollar. There IS no other explanation.
Tom Gazaway
Keoney,
Thanks for sharing some of your experiences. You’re one of many thousands of people who have had this happen, including myself. There’s nothing wrong with a bank getting a fee when we either make a mistake or go overdrawn on purpose for a day or two. I’m sure you don’t let it happen too often or you wouldn’t be talking openly about it here probably. The problem is when those fees are excessive, unfair, and unethical. Thanks again for your comments.
Jon Beckmon
There is one problem to this whole theory. Why are people overdrafting in the first place? They need to manage their finances better. Not once in my entire life have I overdrafted anything. I don’t even have overdraft protection on my account. Don’t write checks on money that you don’t have is the simple solution. Imagine if every single person overdrafted their accounts at once what this would do to the banks. They wouldn’t have the money to cover all of these negative accounts that someone has to cover.
Tom Gazaway
Jon,
I understand your point and we certainly would all agree that avoiding this altogether is the best option. However, the issue on the table is that “when” an overdraft situation occurs – and I agree that we want these occurrences to rarely happen – then is it okay for a bank to purposely, and with intent, find ways to charge me as many overdraft fees as possible by reordering the sequence of transactions within a given timeframe? And, btw, congrats on your great track record with not having any overdraft issues at all. Sounds like great budgeting, that’s certainly the ideal scenario.
Jave
(quote):It’s estimated by the Consumer Financial Protection Bureau (CFPB) that banks made between $15 billion and $22 billion in 2011 from overdraft fees. That’s down from much higher estimates in previous years. According to American Banker, Chase made $500 million a year in post-tax income from high-to-low resequencing.
Your right Jon. Those poor banks. I feel for em. And your statement that, “. Not once in my entire life have I overdrafted anything. I don’t even have overdraft protection on my account” is highly dubious. Unless your 17 this doesn’t sound realistic. Everyone at some point in their life struggles financially except you? Umm ok
Tom Gazaway
Hi Jave, thanks for sharing your perspective. That’s what makes these conversations so engaging. It wouldn’t be any fun if nobody had any passion or emotion or if we all thought exactly alike. I think it’s perfectly okay for a bank or company to make a lot of profit but I don’t like any business model or practice that says it’s okay to gouge (Judge Alsup’s words not mine) or take advantage of anyone and charge them excessively for multiple transactions when only one or two transactions are in order.
Jon Beckmon
To everyone, For the person that commented unless I am 17 that is not the case. I am actually 44 and have never overdrafted one time in my life. Don’t think I’m always doing so well either, I just know how to cut back on my lifestyle when I’m not doing well. I always live within whatever amount I make no matter how small or large that is. To give you an example on how tough times sometimes are for me in 2003-2005 I ate almost nothing but Top Ramen for dinner every night (.20 cents per meal as I ate 2 of them with nothing else). While I haven’t had to do that since those were some tough times but not once did I overdraft my account even during those times. You just have to learn to live a different lifestyle and plan better. I keep close track of how much I have in the account at all times and sometimes that is not very much. I have walked to work before too. I don’t know how far away from work you live to the guy that desperately needed Gas but maybe you should learn to carpool or hike. Or if you live a very far distance from work then try to find a way to live closer to work. Just commenting since you act like I’m a teenager that hasn’t had a rough life. Just because people don’t overdraft does not mean that they are young or haven’t had hard times. I currently work around 100 hours a week and it’s commission only so you’re not guaranteed any minimum wage at all. While I was eating top ramen it was the same hours at work but commissions obviously weren’t so hot. I’ve never wasted any money on alcohol or anything like that either. During the times I was eating top-ramen every night I also never missed a payment to the bank on a loan I took out. My bills always get paid though my lifestyle might suffer because of it. America’s borrowing habits are going to land it in big trouble one day.
Tom Gazaway
Jon,
Thanks again for sharing and commenting. Nobody can knock your discipline and it sounds like you’ve got an amazing work ethic too. I would love your perspective and your answer to this question, “if someone mis-calculates their checking account balances (for whatever reason) then how would you feel about a bank hitting them with 6 to 8 overdraft fees due to reordering even though it was only one or two of the transactions that occurred after the account was overdrawn?” I don’t think you’ve actually commented on those types of situations.
Jon Beckmon
Dear Tom,
I have mis-calculated my checking account balance before so I do understand that mistakes get made. Fortunately I caught it quick enough not to cause issues and the few times I’ve mis-calculated I did have a very small cushion. With so much automation in the banking industry however it might be very hard for the bank to know when some items come in. On debit and credit card cards that act as debit totals for instance. I agree on checks that the bank should clear them as they arrive but one problem…Some business’s don’t deposit checks immediately and so those might clear at different times.
I agree that people should only be charged for transactions that occur after the account overdraws or that overdraw the account but let me give you an example that could show how some of these problems arise. I run a small business and the credit/debit machine we have only clears the accounts out at end of day. So if a person for instance went around charging a bunch of items in one day that caused their balance to become overdrawn but the business’s where they charged the low amounts closed at a later time of the day and the last business they went closed at say 5:00 PM and the total was too big for their account and that one cleared first electronically and then the other business’s that closed at 10:00 PM closed all of their accounts at that time which are now faced with an overdrawn account and so all the totals clear out and these transactions all cause them overdraft fees. So it’s not as cut and dry as it seems. The money doesn’t get deposited in my account for a number of days after these transactions take place either so it’s not immediately available for me to use. So people really have to be very careful in their account balancing. Hence the reason I balance my checkbook line-by-line and always keep it up to date as each transaction takes place on exactly how much is available. A guy bounced a check to me that caused my account to hit -1.00 so I had to quickly get to the bank to make a desposit. This also shows how chain reactions can occur when people bounce checks to others.
Jon Beckmon
Dear Tom,
On that -1.00 in my account that was only in my books..Not on the banks books or I would have got hit with fees. Not all my checks had cleared yet. The bank virtually always claims I have more money in it than I actually do because running a business means you have a lot of bills. I once read a post in my industry that the guy said if you want to run a business then get used to paying lots of bills because I have 2 rents, 2 gas bills, 2 electric bills, 2 phone bills, etc ,etc.
Tom Gazaway
Jon,
You bring up some good points and I agree that when a merchant cashes a check is a variable that can’t be controlled. However, the majority of the issues are also resolved by banks applying the debit card charges in the actual order they occured. I can’t see how the “batch out” effects this since the cards is either approved or denied upon being swiped or keyed in. When the merchant batches out would only effect when the merchant gets paid but not when the charge occurs and is taken out of the card-holders account. Thanks again Jon.
Jon Beckmon
Dear Tom,
Well we go through a third party processor. I know the card is checked when it is scanned but as to whether the funds are actually removed from the card holders account at that time I can not say. I know the third party processor sometimes holds the funds in their account for a short while (maybe 3-4 days) before actually releasing them to the business but at what time these charges are actually removed from the card holders account I can not say for sure.
Julio
Get real Jon. When people swipe their debit cards the transaction shows up within a couple of minutes. The banks know good and well the order that things are done in. We aren’t talking about checks here.
People make mistakes. They shouldn’t be charged $35 * 5 instead of $35 * 1. The banks should understand that people make mistakes, as they made some huge ones. The gov’t bailed them out of it. If the banks want to play hard ball and stick it to people over mistakes, then the gov’t and true capitalism should have played hard ball and let them fail.
Christopher Otubor
Tom, good evening. Here in Nigeria is evening. I really appreciate the comments and discussions by all of you. I pray someday i will meet with any of you. Tom, i will appreciate if you extend an invitation to me to meet with you one on one. I am resident in Nigeria, a lecturer, Department of Banking & Finance, University of Jos, Plateau State and a Ph.D student in the same university. Cheers