Kill Unfair Overdraft Calculations Before They Kill You

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One of the first financial lessons kids learn is to balance their checkbook. They are taught to record each transaction in their register and recalculate their account balance using a chronological system. Consumers assume — perhaps naively — that banks process their transactions in the same sequence, using the same system. Of course, that isn’t necessarily the case…

For years now, retail financial institutions have surreptitiously manipulated the order of consumers’ purchases and deposits to trigger millions upon millions of dollars in unexpected overdraft fees — charges customers would not have incurred if transactions were processed in a first-to-last system.

If you’re still doing this, stop. Today. It may be legal (for now), but this is precisely the type of issue the new U.S. Consumer Financial Protection Bureau will be looking to smack down. And just because it’s legal doesn’t mean it’s the right thing to do — for consumers, or for your brand.

What makes reordering transactions so diabolical is the implicit deception. It’s inherently nasty. Banks know nearly everyone thinks their transactions are processed chronologically, and yet banks make no effort to alert consumers about the surprising structure of their overdraft schemes. Such a method of calculating account balances is so wildly divergent from what people expect — it’s so completely illogical and counterintuitive — that folks get very cranky when the truth comes out. They feel passionately that they have been misled, and that they should have been warned more clearly upfront. And by banks failing to do so, consumers assume that someone had something to hide (they probably did), and that someone was trying to deliberately screw them and get away with it (they probably were), often to the tune of hundreds of dollars.

Trust is the fundamental basis of every relationship everyone has with every brand. If consumers don’t trust you, you’re dead in the water. Once a consumer’s trust is blown, you can forget about selling them anything. You’re done. You’re a liar and a cheat. You’re in the same shoes as a husband busted for having an affair; it will take years of work to rebuild trust, and that’s if you’ve got any chance at all.

If you have a competitor in your market(s) reordering purchases and you aren’t, go for their jugular. Take the fight for checking accounts directly to their doorstep. With people as prickly as they are right now about bank fees, you could snatch up oodles of new relationships …simply by telling consumers the truth.

Interactive Example of Overdraft Calculations

Pew Research created this graphic to illustrate how banks can post debits and withdrawals in non-chronological order to trigger the maximum number of overdraft fees charged to a customer. Pew is encouraging an end to this practice and for banks to post transactions in a fully disclosed, objective and neutral manner that does not maximize overdraft fees.

To use the tool, you can compare the order of one customer’s purchases with how the bank processed them by toggling between the two tabs.

The federal district court in Northern California found that Wells Fargo’s large-to-small posting practice for transactions was an unfair and deceptive practice. It ordered the bank to change its practice — at least in that state — and refund $203 million back to customers. In November 2011, BofA agreed to pay a $410 million settlement in a similar case. And it’s not just big banks being targeted with lawsuits. Smaller banks like Bank of Oklahoma, which just settled for $19 million, and Associated Bank, which settled for $13 million, are also finding themselves on the losing end of court battles.

Currently, BofA has no overdraft product. The bank is rejecting debit card transactions if there is insufficient funds in a customer’s account. They had planned to provide a text message solution with an option to go ahead with the transaction for a $35 fee, but BofA surprised everyone when it announced they were scrubbing the plan.

Since losing its court case, Wells Fargo has promised to post the most common types of transactions, like debit card transactions, chronologically (or low-to-high) for all accounts.

Wells Fargo has joined other big banks like Chase, Citi and HSBC who have decided this year to abandon overdraft reordering.

There are, however, still quite a few retail financial institutions gouging customers for as many unnecessary overdrafts as they can.

“Banks make the dubious claim that they are do customers a favor with this practice,” wrote Willy Staley, a reporter with MyBankTracker.com. “Larger purchases are more important than smaller ones, typically, and banks are merely helping more important purchases clear first because most customers prioritize them.”

Ardie Hollifield from The Pew Center, who spoke with MyBankTracker about the report, says this is difficult to swallow.

“Do banks make complex systems upgrades based around other perceived customer preferences — ones that they have no stated financial interest in?”

It’s a fair question.

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