Banks are still struggling with the decisions executives made to maximize profit from overdrafts by rearranging the order of withdrawals to customers’ detriment. By December last year, Bank of America settled a class-action lawsuit related to overdrafts and was expected to pay $410 million. That decision is being appealed by a plaintiff, so it will still be a long time before the results are determined and class members receive compensation, if any.
Earlier this year, JP Morgan Chase settled a related class action lawsuit for $110 million.
Citizens Bank is the latest bank to come to terms with the way it took advantage of customers. This bank has agreed to pay $137.5 million to settle.
For the most part, banks continue to engage in the process of reordering withdrawals processed on the same day (whether the withdrawals be through checks, electronic direct debits, or ACH transactions) to optimize the possibility of collecting multiple overdrafts. The largest withdrawal is processed first, and subsequent withdrawals are processed from largest to smallest. Banks offer a reason for this order. They claim that the largest withdrawals are often the most important, such as rent or mortgage payments, and want to ensure these payments have the strongest possibility of being processed. That explanation doesn’t hold up for customers with overdraft protection, though, because this service allows all withdrawals to be processed — for a fee.
Furthermore, banks at the time of the lawsuit often allowed for multiple overdraft fees on a single day. With a $200 bank balance and withdrawals of $20, $50 and $300 in one day, the customer could be charged three different overdraft fees of $35. This is obviously more profitable for the bank than allowing the smaller transactions to be processed ahead of the larger withdrawal. Since the media attention surrounding the lawsuit, some banks have changed their policy to allow for only one overdraft fee per day, but many banks continue this practice.
So far, the only new regulation regarding overdraft fees requires banks make the service optional. Customers can opt to have transactions declined when the funds are not available to cover the withdrawal. Banks still steer customers towards overdraft protection as they feel it is a better experience for the customer, and, of course, a significantly profitable approach for banks.
Are you a customer of Citizens Bank? Have you ever had problems with Citizens Bank’s overdraft fees and policies?
Published or updated April 27, 2012.