With New Rules In Place, Old Overdraft Gimmicks Under Fire
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photo: Joshua Davis
On August 15, new overdraft rules went into effect, preventing banks from imposing overdraft fees on debit and ATM card transactions unless the customer actively opts in to have that feature.
The new rules have been largely hailed as consumer-friendly, with one caveat: they did not address the practice of reordering how multiple debit-card and check transactions post to one’s bank account. Many banks post transactions not in the order in which they were made, but from largest to smallest in terms of dollar amount. That practice, according to consumer advocates, effectively causes many people to overdraw their accounts sooner – and more often.
Consider this example: you only have $100 in your account and in one day you charge $5 at the coffee shop, $25 at a bookstore and an $80 at the supermarket. If the bank debited those transactions in the order you made them, you would overdraw your account just once and be charged one overdraft fee. But if it reordered those transactions from largest to smallest, you would overdraw your account twice and be charged two overdraft fees.
Now, a federal judge in California has taken issue with that practice. Last week, just as the media was getting busy reminding consumers of the new overdraft rules, Wells Fargo (WFC) was ordered to pay more than $203 million in compensation to customers who were charged overdraft fees thanks to reordering transactions in this way.
Wells Fargo collected nearly $1.8 billion in overdraft fees in California from 2005 to 2007. The bank plans to appeal the court decision.
If the decision is upheld, consumers have a lot to win, says Ed Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group. “Reordering checks is a gimmick banks use to increase overdraft fee revenue,” he says.
Even if the ruling is overturned, however, Mierzwinski expects that new Consumer Financial Protection Bureau that starts in 2011 will ban the practice.
In the meantime, consumers should set up low-balance email or text-message alerts from their bank, Mierzwinski suggests, and link their checking accounts to a credit line or a savings account, so that if they do withdraw their account the bank would make a transfer for a much lower fee.
The bigger question is, of course, how this court decision may affect the industry. With this practice now in the limelight, could other big banks take the lead and abandon it preemptively?
Greg McBride, a senior financial analyst at Bankrate.com, says he doesn’t think that’ll happen. Consumers have actually expressed preference that their largest payments are honored first because they are typically more important. “It’s cheaper for them to pay a $35 overdraft fee than pay a late fee on their mortgage payment,” he says “What they don’t want is to pay a $35 fee on a $3 transaction for a bagel and coffee and it’s important consumers are given that choice.”
Still, McBride adds, the frequency with which consumers encounter this practice will go down as a result of the new overdraft rules.
Jim Sinegal, associate director of equity research at Morningstar says this court decision will at the very least cause more people to focus on the fairness of overdraft fees.
“It just doesn’t make sense to charge a $35 fee for a potentially $1 dollar loan,” he says. “I think we are going to see a lot more pressure on those fees.”
As a result of the new overdraft rules – and, potentially, of this latest development with reordering transactions — banks might not be able to charge as much in overdraft fees. But, as usual, they will find other ways to make money. “Banks will find a way to pass some of these costs to their customers in different ways,” Sinegal says.
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20 Comments so far
leave a commentI think in your example, if the consumer had not opted in, they would have a cup of coffee, a new book, and no groceries since their transaction would be denied at the supermarket. No fee, but no groceries.
No, McB, they would have a cup of coffee, a new book, and instead of $80s worth of groceries, they would have had $70s worth.
OR!… they wouldn’t have to pay roughly 45% (in interest – assuming $35 overdraft fee) on a $80 purchase.
This practice is completely insane and needs to be stopped. I got blasted by wachovia to the tune of hundreds of dollars because, after making a sizable deposit on a nearly $0 balance, they first took my debits, from later in the day, racking up overdraft charges – was a customer for 10 years and didn’t even know that existed until then. I always just figured my card would be denied. Luckily I had enough savings and chutzpah to get myself out, but a friend of mine is going through the same thing and hasn’t been so lucky (it’s taking months to dig her way out). A $0.79 bottle of water ended up costing $36.
Read the “Big Short” at one point, one of the countries largest banks admits to free checking being a ploy by banks to muscle money away from the poor through these kinds of fees.
Completely predatory and useless in every way.
I think that the customer should have made his mind as to what is most important…groceries for a week or a dingy book and some crap coffee???
or maybe he went to check his available balance, and it seemed like he had enough because the bank hadn’t recorded the purchase yet, and so he made the other purchases, racking up a bunch of unneccessary overdraft fees. This is excellent news and anyone who doesn’t agree works for a bank.
This happened to me once, and I ended up getting $150 in overdraft fees for buying 4 .99 Arizona iced teas (in different stores over the course of the day)
Its about time this happened. I learned this crap out the hard way about a year ago and realized then the system was rigged against you. First of all, I had never asked for the bank to pay bills that i didn’t have money for and its completely unfair that they do it without telling you. “Its in your terms and services”. So it is about ten pages of other purposefully jargon-filled crap that is intended to be ignored and paid for later. In my situation, I had made a bunch of purchases that I willfully made but then paid my insurance (intended with a credit card) but the company had my bank card from a previous payment on file and automatically used that card with me unawares which overdrafted me about five times because they did the highest to lowest thing to me. I asked the bank why they would pay for something i didnt have money for, oh its a service not a flaw. Its just a way to suck money out of your client. Sorry bubs, you will have to come up with a more nefarious method for treating your client (customer?) like an atm….
you would think it would be instant though.
considering we are in the tech age.
its not like they need to make a carbon copy of the card anymore. then mail it in.
it is all done via modems.
16 digits plus a 3 digit security code plus name and expiration date and maybe the address.
you can fit that in a twitter comment.
one packet at 2400baud(thats what banks use)
but instead they pull that kind of stuff.
that is what i think should become illegal IMHO.
I think the person might have put back an item or two at the grocery store when the card was declined for NSF.
BTW what banks are starting to do now is charging an NSF fee and declining the transaction. Nice people aren’t they?
Yeah, I got hit with that NSF Fee and declining the transaction fee a few days ago. I couldn’t believe it. Now I owe the bank $64 (they add $4 to every subsequent NSF to the first). Good thing I had two checking accounts at different banks.
Clearly the customer in question is a stoner or at least some kind of drug raddled sex addict.
Coffee… bookstore… then groceries.
First of all, caffeine is horrible for you and f$12′s up your nervous system. Eventually it causes a whole host of horrible health related problems so I’m glad this poor bastard over drafted. Hopefully he’ll be put out on the streets to rot like the other drug addicts and not be a burden on our healthcare system.
Now bookstore. Who spends money at a bookstore any more? Seriously, with the new iPad only costing around $500, plus only $13/book who has the time to drive to a bookstore and hold something real, that also smells, for $14. More likely than not, he was paying a hooker that works at the bookstore for a half and half $25 so he could get his rocks off on an old copy of Catcher in the Rye.
Finally groceries… Daniel, I’ve got to agree with you here, it’s clear he’s the Antichrist.
Banks are just weeding the worst of us out. If we go… it was our time to go.
wow you are a rtard.
one caffeine has NOT been proven to be so bad. like other things it is blown way way way out of proportion.
studies lately have proven it has NO to little effect on the body. i guess your a stoner yourself.
second why the heck an ipad. why not a kindle or other brand? do you work for apple or just a fanboy?
let see on the math it would take you 500 books at $14 to equal what the itampon costs if you were to buy one and only buy books from there.
then there is the fact of a monthly charge on top of that.
then there are groceries.
so you are saying that them putting groceries list on the list they are horrible people?
i must ask why?
i live on $16/wk for groceries.
so the HYPOTHETICAL person may HYPOTHETICALLY want better tasting food.
i take it you work for said banks!
“Greg McBride, a senior financial analyst at Bankrate.com, says he doesn’t think that’ll happen. Consumers have actually expressed preference that their largest payments are honored first because they are typically more important. “It’s cheaper for them to pay a $35 overdraft fee than pay a late fee on their mortgage payment,” he says “What they don’t want is to pay a $35 fee on a $3 transaction for a bagel and coffee and it’s important consumers are given that choice.””
-This guy is just a bum. Listen, banks process debit/credit card transactions or online transactions in batches on the next business day. So if you make like 15 debit/credit transactions over the weekend they will process them all on Monday morning. They order it by amount so that you will overdraft. Any person who has ever worked with database systems will tell you there is no reason they cannot order it by transaction time.
The dumb statement about the mortgage is stupid too. If your overdraft covered all your transactions that overdrafted that means it would have covered your mortgage check as well. Take the mortgage first only pushed you into overdraft sooner equaling more bank fees. Trust a bank analysis to be impartial towards banks.
I’m just glad that my bank, before this bill even, always applied deposits made first thing in the morning right away. A bill came in early once and put me just in the red, so I rushed to the bank on that Sat night, and made an ATM deposit. First thing monday they applied the deposit; then applied the bill and gas. I promptly changed that bill from automatic to the mail again after finding out they changed the automatic payment rules to twenty days before due.
I use a regional bank for mine, and even a google search on ratings nets only two negative comment(on rip off report) that were obviously consumer stupidity.
I chose overdraft protection for this bank, that’s right they offered it as opt in well before legislation, even though they don’t require it. Looking around other places to live I noticed the same thing. Though if I ever move I’m declining a debit card, and sticking with a credit card as it’s better for making gas purchases, or for emergency vehicle repairs.
There’s this great thing called a CHECK REGISTER. If you WRITE DOWN all of your transactions, you will know how much money is in your account. Then, if you don’t have the money, don’t spend it. It’s that simple.
Sure, every now and then a mistake will happen. But banks in CA made over A BILLION dollars on overdraft fees in TWO YEARS? Are you telling me that the folks in CA are that stupid? Yes. Yes they are.
Check Register? your joking right? you know how many tiny purchases people make with debit cards? dream on.
the whole POINT of having a bank account is so the BANK can do some of the work for me. If I have to start micro managing my transactions to the penny to avoid fees then what the hell do I need the bank for?
I DONT WANT to spend the money if I don’t have it. Problem is they are spending it for me WITHOUT my consent. When I opened my account at first union a long long time ago it worked just like it was supposed to work.
when I was out of money guess what happened? IT DECLINED. wow what a concept. I freaked the first time they gave me a “micro loan” and charged me $35 for the privilege. I said turn that crap off. Who the hell are you do just “poof” give me a loan without my consent.
a few years later of course it became MANDATORY.
are you telling me now it will decline and they can STILL charge the fee? what kind of sick joke is that.
Of course anyone in POWER will never encounter this since the only people beat up by these fees are the ones who have no money to pay them.
I have had banks reorder upto 10 days worth of transactions “after the fact” to acrue insane amounts of fees.
last time I checked thats called embezzlement.
then they off COSTLY options to get around it (over draft protection is NOT FREE)
last time I check thats called a RACKET
I thought embezzlement and racketeering landed you in prison in this country?
It’s a witches brew with no perfect solution. The best plan is to simply opt out entirely of overdraft protection. If you can’t keep track of your finances then make the bank decline payment when you exceed your balance….in the long run it will save you money.
I thought FinReg was suppose to solve this.
This is a practice that needs to stop.
The issue isn’t what he spent his money on, but the fact that he was charged 2 overdraft fees by the bank rather than one or having his final transaction declined.
My bank, Bank of the West has/had a program (I have it grandfathered in and don’t know if i still exists) where for a whopping $10 a year the bank takes money from a linked savings account first, and when that runs out, you can get hit.
Yes people need to be financially responsible, but this poor guy shows the problem of being slightly off, missing your balance by $10 really isn’t too hard, especially when dealing with change and more than three purchases.
Banks are for profit and I do thank them for their services, but this is an example of just gouging poor customers.
Most interesting to me was the full-court press the banks were making right before the new rules went into effect (which would make overdraft protection opt-in only).
I endured four separate attempts from Chase. Twice from customer service calls to me (they have never called for anything otherwise), once in the bank when making an in-person deposit to the teller, and another when I called in the ask about mortgage rates (they saw I was a checking customer and tried to get me there too!).
It was obviously easier to say no on the phone, but the worst was the teller in the bank. It was obvious they had some kind of sales quota to hit to get customers to sign up for overdraft protection. The setup of the sales pitch really made me chuckle – “Do you want to let the GOVERNMENT control how you spend your money?” – I let out a pretty hearty laugh as soon as the words left her mouth. Both to her, and on the phone, I said I WANTED my account to be declined. Since my money in that checking account earns such a negligible amount of interest, I am always transferring money out to higher interest online savings accounts, so it hovers close enough where a couple fo bill transfers can sit it on the edge of zero.
In both cases I ended up going into a tirade against Chase in particular, and they backed off, but I left feeling bad and annoyed, and generally worse off for having to do business with their brand.