Banks typically look for every possible instance to charge customers to fees. That’s why it’s particularly important to stay aware of your bank account balances. With the increasing popularity of automatic payments (outgoing) or automatic withdrawals (pulls), a poorly timed deposit can result in overdraft fees or insufficient funds (NSF) fees. A few years ago, I took a survey of the different ways banks process their customers’ debits and credits, and saw how easily it would be for banks to trap customers treading close to low balances in a maze of fees.
For example, let’s say you have $500 in your checking account at the beginning of the day on September 1. You could have previously written a check for $600 to pay your September rent, you could have an automatic withdrawal using your debit card scheduled for $300 to pay your electricity bill on the first of the month. You go to the bank after work and deposit $500 into your checking account.
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Some banks would process the rent check first, generating one overdraft fee of $35. This would be followed by the $300 automatic withdrawal, processed during the ACH batch, but now your balance is a negative $135, so you receive a second overdraft fee and a balance of a negative $470 before your overdraft coverage comes from your savings. Finally, the bank processes your deposit, giving you a balance of $30.
Had the bank processed the deposit first, you would have saved $70. And if the payments were returned rather than covered through overdraft fees, you might have caused problems with your landlord or your electric company. Banks justified these techniques with two specific claims:
- Larger withdrawals should be processed first because they usually represent more important payments, like rent and mortgage payments.
- There’s no consistent way for banks to know what time an automated transaction is received, and thus most transactions should be processed in batches at night.
Consumer groups have criticized banks for this approach because it isn’t consumer friendly, it’s designed to maximize profits at the expense of customers, and it’s rather easy to improve. And after class-action lawsuits and guidance by the Consumer Financial Protection Bureaus, more banks are improving their procedures.
Wells Fargo is in the process of making some positive changes. Again, I’m a long-term customer of Wells Fargo, or to be more accurate, I’ve been a customer of a string of banks that, through a series of mergers and acquisitions, has ultimately (so far) become the bank known as Wells Fargo.
As of August 11, Wells Fargo no longer posts checks and automatic payment transactions (ACH) from highest to lowest value. Instead, the bank will post transactions based on the date and time the bank receives them. It still isn’t as simple as it sounds. Wells Fargo doesn’t post these transactions immediately. That happens during the same nightly batching process. Each branch has a cut-off time for deposits, but you may not see that cut-off time until you visit the bank or ATM.
Cash deposits and transfers made before the cut-off or after the cut-off and before batch processing begins will be counted as available when other transactions are posted during the batch process. Check deposits might not clear the same day, however. After the any qualifying deposits are posted, Wells Fargo will process debit card purchases, ATM withdrawals, account transfers, online bill payments, and teller-cashed checks based on the time the transaction occurred.
Then, Wells Fargo pays your checks and automatic payments. This is the category that used to be prioritized by value, from high to low. Now these will be processed in the order the instructions were received by the bank, and if no time information is available, they will be processed from low value to high.
Wells Fargo has some additional changes coming in September. More transactions will be considered “pending withdrawals” during the day. Previously, you wouldn’t be aware of pending withdrawals during the day, but now, Wells Fargo will mark them as pending withdrawals as soon as they are received, and reduce your available balance immediately. The withdrawals will still be processed during the nightly batch. If you look online, you’ll be able to see pending withdrawals beginning September 19.
While these changes do reflect some improvements and perhaps some clarity over the old system, there are still certain instances where customers can find themselves with multiple overdraft fees or returned payments.
Even diligent people make mistakes with their financial accounts. But the best way to avoid having to deal with these issues is by taking a sensible approach to account balance maintenance:
- Know how much money is in your bank account.
- Don’t write checks or initiate automatic withdrawals using money that isn’t in your account and available today.
- Keep track of your finances so you don’t have any questions about whether your payments will clear your bank account.
- Always keep a solid buffer in your checking account. Choose a buffer amount that covers your weekly transaction volume.
- Set up an alert (with your bank, with Mint.com, with Quicken, or with some other tool) to alert you if your balance is low.
Wouldn’t you know it, I found myself dealing with an overdraft fee recently. Yes, even people who write about personal finance make mistakes. To be honest, as budgeting became less of a necessity for me, I let some of my financial guard down, and haven’t been tracking my finances as closely as I used to. For many years, I looked at Quicken on a daily basis, but I haven’t done so in a while. I’m trying to get in the habit of checking my transactions once a week, but it’s going to take me some time to improve the accuracy of my transactions over the last year or so.
For more information on Wells Fargo’s new posting order policies, you can read this PDF.
Were you ever stymied by the way your bank processed your deposits and withdrawals over the course of one day? Are these changes by Wells Fargo significant improvements?