Banks Work to Maximize Overdrafts

Here's another one for the "banks are working against us" file, this time from Consumerist where they note that banks cash big checks first to maximize overdrafts. A summary of the situation:

USATODAY research indicates banks typically process checks in order of highest balance, maximizing overdraft fees charged to the customer, critics contend.

"There is no excuse to process the transactions this way," says Jean Ann Fox of the Consumer Federation of America. "The only reason is to charge more fees."

So here's the situation. Let's say you have $500 in your checking account and you write checks for $100, $200, and $400 (BTW, I'm ignoring for the moment the fact that you should be in control of your money enough that you don't write checks that you don't have money for -- but that's for a different post.) Let's say the checks hit the bank on the same day and the bank charges you $25 for every "insufficient funds" check it processes. Here's how the bank will process the checks:

• $400 check hits first, leaving you with a balance in your account of $100.
• $200 check hits next, you have insufficient funds, you get charged an extra $25.
• $100 check hits next, you have insufficient funds, you get charged another extra $25.
• Net result: You get hit with $50 in fees.

Here's how they could process the checks -- if they wanted to charge you as little as possible:

• $100 check hits first, leaving you with a balance in your account of $400.
• $200 check hits next, leaving you with a balance in your account of $200.
• $400 check hits next, you have insufficient funds, you get charged an extra $25.
• Net result: You get hit with $25 in fees.

In other words, your bank is working to make itself as much money as possible. According to USA Today, this is quite profitable for the banks:

The order in which banks process checks and other debits determines the overdraft fees they charge. Those fees make up 90% of service charges on deposit accounts, and they're expected to yield a record $53.1 billion for financial institutions this year, research firm Moebs Services says.

Now, as I said earlier, you should be in enough control of your money that you're not writing checks for money you don't have in your account. But still -- what a rip-off.

Just remember that banks are businesses and they're out to make money for themselves. If you'd like to keep more of your money out of their pockets, check out Saving Money on Banking.

Comments

[Patrick]

That exact thing happened to me a couple of years ago, only, to my horror, it was about 5 or 6 checks. I had one large check that I had (stupidly) forgot I had written, and about 5 other very small checks/electronic transactions that all hit on the same day. The bank put the large check through and then hit me with a fee for each of the five others. A couple of days later, the bank was nice enough to inform me that I owe about $150 in overdraft fees. When I called to complain, they "kindly" offered to split the difference with me - something I now realize they probably do quite often.

[John]

That's bad business. I avoid that bank because of it. It's stories like these that make me feel good about the bank we have now.

[segfault]

The banks' side of the argument is that they process the largest amounts first because those are typically important things like mortgage and car payments, tyring to prevent people from going into default on major loans.

[MrAtoZ]

In this age when you can always check your balances online (or at least over the phone), it's hard for me to get outraged over people who are writing checks their accounts won't cover. We can argue that banks ought not to be bleeding people with excess fees, but if you're bouncing checks because of profligate and heedless checkwriting, that's not the bank's fault.

[treacherous]

But banks ARE in business to make money for their owners/shareholders. It makes sense for them to do it this way.

Although, it does suck for those that make the mistake of overextending themselves.

[FMF]

T -- Yes, but one way many businesses earn more is to put their customers' interests first. ;-)

[Phillip]

I had this happen to me due to a posting error on my part and got hit with 5 $35 fees for the five items that "bounced". I got to analyzing the statements from the past few months and noticed the bank always cleared the items largest to smallest and that if done in reverse, I would have only had one charge. The manager could not believe what was being done and reversed the charges.

[Eric G.]

If you have never overdrafted your account and make a mistake call your bank and you can almost always talk them into removing it. The only time they won't is if you overdraft all the time and in that case you deserve to get charged.

[vsa]

Folks, yes, banks want to make money. I'll admit it--I worked for a commercial bank before but now work for a credit union.

I have seen people go through the cascading overdraft fee problem, and I genuinely feel sorry for them. (I've even gone through it myself once.)

However, there is a legitimate reason they do this: your larger debits or checks are usually things like mortgage or rent payments, insurance, or utility payments. Let me point out that the banks DID pay your checks/debits and saved you the problem of having to deal with the electricity or water being turned off.

What you should do is investigate other overdraft options. Most banks offer overdraft lines of credit with low transfer fees, the option to overdraft out of savings, or...they can return those checks/debits, but they will still charge an insufficient funds fee. Some credit unions don't have any fees for overdrafts out of savings (although Regulation D transaction limits apply).

Ultimately, your best bet is to maintain a cushion ($50 or $100, whatever feels comfortable) in your checking account, set up your preferred overdraft option, and regularly balance your check register. Most banks and credit unions offer online banking, and I encourage use of this. Be familiar with your bank's policies, and know the folks at your local branch. They will be much more willing to assist (and waive fees) if you show that you are actually trying!

[Ekim]

I am all for banks making money. But this can be done by creating Win-Win situations for all without price gouging.

MrAtoZ speaks of banking convenience:
If the internet makes banking more effecient for consumers to reconcile the paychecks then why are similar effeciencies not realized. There still is a 3-5 day bank transfer float? Banks once stated that 3-5 days were needed to transfer checks physically as well as bank verification of funds. This is no longer needed and should be discontinued. 24 hours (8 business hours) should be the maximum.

It is strange how I read about the middle class is warring against themselves and show no empathy for each other. I am responsible and think people should be more responsible for themselves but there should be a middle ground for all people to agree.

BTW I use a credit cards and pay off on time every month so it doesn't affect me daily but it is a matter of principal that the bank processes should be fairer.