Banks’ Manipulating Debit Payment Policies to Rack Up Overdraft Fees

In an apparent effort to recoup some of the losses suffered under enactment of new financial reform laws, some banks are manipulating the order in which they process bank account transactions to maximize the number of overdraft fees they can charge customers.

Here’s one of the scenarios reported by irate bank customers:

Say you have $500 in your checking account on a day that your bank receives four debits against your account:

$5 latte

$220 groceries

$80 veterinarian

$565 auto insurance

Your total debits for the day total $870 against a balance of $500, overdrawing your account by $370.

If the bank debits the three small purchases totaling $305 (easily covered by your $500 balance) before it processes the larger $565 insurance debit, you would incur a single overdraft fee. However, if the bank debits the larger purchase first, causing your account to be overdrawn, it can charge an overdraft fee for each subsequent debit. At the end of the day, you’ll pay 4 overdraft fees instead of one! At $35 a pop, that’s a loss of $105.

Bank customers expect their accounts to be debited in the order purchases are received. Consumer credit repair experts, however, have found that many banks — 25% according to a 2006 FDIC survey — shuffle debits received in the same day to maximize overdraft fees, generating significant profit for banks.

In our example above, if the insurance transaction arrived at the bank early in the day and was processed before the other transactions occurred, most consumers would agree that, while onerous, the bank is within its rights to impose 4 overdraft penalties. However, when the three smaller purchases occur before the insurance debit arrives, consumers rightfully argue that they should only be charged a single overdraft fee. When banks processes debit transactions out of order to rack up fees — known as “high-to-low” check clearing – consumers are understandably outraged.

Wells Fargo bank was recently called to task for high-to-low check clearing by a California judge who called the practice “gouging and profiteering.” Wells Fargo was ordered to pay $203 million in restitution to customers who had been unfairly charged. While the U.S. District Court ruling applies only to Wells Fargo bank, it is considered an encouraging sign for similar suits in other states.