Deposits and Withdrawals: Do Banks Trap You Into Overdraft Fees?
There really is no need to pay many bank fees – in theory it’s easy to avoid overdraft fees by making sure you have enough money in your account. However, many national banks practice predatory behaviors, particularly with these exact types of fees.
For example, Bank of America settled a long-running class-action lawsuit on overdrafts and agreed to pay $66.6 million to settle the suit in late 2017.
What happened was that the bank was accused of using overdraft fees to collect exorbitantly high-interest rates from customers who let their accounts be overdrawn for several days. Bank of America was essentially making the customers a loan by allowing these overdrafts in the first place. And then they were charging incredibly high-interest rates–in the form of fees–on that loan.
Even with high-profile lawsuits like this, banks haven’t completely changed things like when banks process transactions and decisions about withdrawals. In other words, you may still be hit with multiple fees.
Of course, it’s a good idea to do everything you can to avoid overdrawing your account in the first place. But if you are in a financial bind, it’s a good idea to take a look at how your bank handles overdrafts and whether it offers overdraft protection. That way you can see whether or not you’re effectively being trapped into getting hit with multiple overdraft fees in the same day.
How Do Bank Posting Times Work?
What happens is that banks post transactions in such a way that you might end up incurring an overdraft, hence those fees.
For example, you know you have an automatic withdrawal hitting your account today for your monthly mortgage payment. There isn’t quite enough in it to cover the withdrawal, so you make a cash deposit or conduct a transfer from a connected account online. The deposit and withdrawal are on the same day, so the automatic withdrawal should be covered, right?
That’s not always the case.
Many banks will process all withdrawals first–from the largest amount to the smallest–and then they’ll process your deposit last. So what happens is that you’ll be hit with overdraft fees if there isn’t enough in the account since it processes the withdrawal first.
Is That Even Allowed?
Federal law doesn’t regulate the order that banks post checks to your account. The Federal Reserve says that banks typically process the largest to the smallest transactions within the same day assuming the largest payments you make are most likely to be the most important.
You can protect yourself from these types of predatory practices by opting out of some overdraft protection — if you don’t have the funds to pay for a transaction, overdraft protection will let the transaction through but charge you a one-time fee. The Federal Trade Commission says that you have to specifically opt-in to overdraft protection. If you don’t opt-in to this service, your transaction will just be declined.
Keep in mind that this doesn’t apply to recurring, scheduled transactions. In these cases, banks can usually enroll you in overdraft protection plans without your permission. So scheduled transactions can overdraw your account and you’ll be charged a fee.
Understand How Your Bank Works
The truth is that most banks aren’t exactly transparent in terms of telling you of these predatory practices. However, it can be helpful to know how your bank deals with transactions so that you’re not caught with paying overdraft fees if you can avoid them. We checked out the policies of 10 banks to get a feel for differences in how banks deal with ACH deposits and transactions.
Existing Banks (Brick and Mortar Banks)
Wells Fargo will process incoming transfers or deposits first, then ATM withdrawals or debit card purchases. These are sorted by the lowest to highest dollar amount. Afterwards, ACH withdrawals or checks will then be processed from the lowest to the highest amount.
If you do incur an overdraft fee, you can’t be charged more than three times per day. However, their more recent Overdraft Rewind feature gives a “second review” of the previous day’s transactions at 9 a.m. the next morning. So if you deposit cash or get a direct deposit overnight, you could get Wells Fargo overdraft fees from the previous day refunded to your account.
According to Citibank’s documentation, it processes transactions in the following order:
- Deposits made before the deposit cut-off time the previous day.
- Fees for any Citibank services provided.
- Transactions received in real-time during the day are taken out or added as they occur. They are processed based on the account balance, and then any associated fees are assessed.
- Outstanding checks and any ACH debits not deducted during the day are processed from lowest to highest dollar amount.
You can sign up for its Safety Check service as a way to avoid Citibank overdraft fees. With this service, your checking account is linked to a savings or Money Market account. The bank can automatically transfer money from your savings account to cover the overdrawn amount, rather than charging the Citibank overdraft fee.
Chase’s online documentation provides a clear outline of how it processes withdrawals and deposits:
- Puts outstanding deposits to your account first.
- It processes transactions such as wire transfers, debit card transactions, online banking transactions, ATM and teller cash withdrawals, and checks cashed or deposited by a Chase employee in the order they come in.
- Then it’ll withdraw other items, including checks deposited or cashed from the highest to the lowest dollar amount.
The bank did say that it can change the order of some of these transactions in several states, so contact Chase to find out exactly what’s going on.
Chase is among a list of banks with overdraft protection overdraft protection. For one, it won’t charge an insufficient funds fee if your balance at the end of the day is overdrawn by $5 or less. But if it’s overdrawn for at least five consecutive business days, they’ll charge an additional $15 Chase overdraft fee.
TD Bank (Commerce Bank)
TD Bank processes transactions, including pending transactions, in chronological order. However, checks that are cashed or deposited at another bank are batched and processed at the end of the business day. In other words, you can overdraft with a pending deposit.
TD Bank does offer some overdraft protection services. You can link an account to your checking account, the bank will transfer money to cover your TD Bank overdraft fee for a $10 fee. If you make a deposit to bring your balance back to the black before the end of the business day, you can avoid overdraft fees altogether.
Capital One process transactions in the following order:
- ACH transactions and manually approved checks from the lowest to highest dollar amount.
- Cash, such as ATM withdrawals and wire transfers from the lowest to highest dollar amount or chronological order from the lowest to highest dollar amount or chronological order.
- Customer-initiated charges and fees from the lowest to highest dollar amount or chronological order.
- Debit card transactions from the lowest to highest dollar amount or chronological order.
- Authorized ACH transactions from the lowest to highest dollar amount or chronological order.
- Checks from the lowest to highest dollar amount.
- Bank-initiated transactions, account to account transfers and credit and debits that the bank initiates from the lowest to highest dollar amount.
The bank doesn’t charge a Capital One overdraft fee if the amount that’s overdrawn is $5 or less at the end of each business day. The bank does offer overdraft protection services which include linking to a savings account or giving you a one day grace period to make a deposit for the overdrawn amount before charging you a fee. Otherwise, you’ll have to pay it and Capital One can charge you up to four times a day.
Bank of America
I’m sure you’re wondering how Bank of America changed its deposit and withdrawal posting policies after the lawsuit. As of now, here’s how they process transactions:
- First, deposits are added in order of highest to lowest dollar amount.
- Next most debit transactions are taken out based on the date and time you made them, provided the system actually has the date and time for the transactions.
- Then, any outstanding checks will be subtracted in order of the check number.
- After that, the bank will subtract any other electronic payments and pre-authorized transfers in order from the highest to the lowest amount.
- Finally, the bank will apply any fees, including Bank of America overdraft fees, from highest to lowest dollar amount.
As you can see, you still have some of the problem here with withdrawals being taken from highest to lowest dollar amount, but it’s only with some of your transactions. And since the bank processes your deposits first, you are a little more protected from cutting-it-too-close Bank of America overdrafts.
Additional Banks (Online/Mobile Banks)
Online banks tend to be better in the sense that while there may be some fees, some are less strict in how you get charged. In fact, many waive fees that traditional banks normally charge or tend to be a bit less strict in terms of how you get charged.
As one of the most popular online banks, Ally Bank does charge an overdraft fee. However, there is only a maximum of one Ally Bank overdraft fee per day (it’s currently at $25) and it’s only charged if you don’t have enough money in your account–it won’t charge you if it’s due to an ATM withdrawal or a debit card purchase.
Ally Bank says it generally posts transactions in the order they’re received. Direct deposits and transfers initiated from another bank and received by Ally before 6 am ET will be available within the same business days. Otherwise, other forms of transactions such as transfers received by Ally after 6 am ET, checks drawn from Ally bank and wire transfers may be available the next business day.
Chime doesn’t charge eligible customers overdraft fees. It features a program called SpotMe, which lets you overdraw your account for debit card purchases without incurring overdraft fees.
Depending on your eligibility, you may be limited to $20 all the way up to $100. Customers will receive a notification when this happens and when you receive your next direct deposit amount, you’ll pay it back, with the option to give Chime a tip to pay it forward.
To qualify, you’ll need to have at least $500 in qualifying direction deposits each month to your Chime Spending Account. You’ll start at a $20 limit then may be eligible for up to $100 that’s based on factors like your spending and direct deposit frequency.
Keep in mind that SpotMe won’t cover transactions such as ATM withdrawals, ACH transfers, and Chime Checkbook transactions. If you don’t have enough money in your account, Chime will decline the transaction.
Chime will process transactions in the order they’re received–generally direct deposits are available on the same business day, whereas other types of deposits can take up to five business days.
Radius Bank online bank accounts charge overdraft fees much in the same way that Bank of America does. Radius Bank will also charge an extra $5 per day for accounts that are overdrawn by more than five days.
It does offer options like overdraft protection where you can pay back your negative balance on your next paycheck, bypassing the overdraft fee. Radius Bank allows you to link your savings account so if your check account does not have enough money, it’ll automatically make a transfer from your savings.
Radius Bank tends to process transactions in this manner:
- ACH transactions posted from highest to lowest dollar amount
- Checks will be processed by serial number or check order
- All other types like deposits and debit or ATM transactions will be posted in the order they’re received
Bank Novo charges a $27 overdraft fee. It currently does not offer overdraft protection but claims that it has processes in place such as reminders. Bank Novo also begins with smaller withdrawals and works up to the larger ones on the day they’re processed to help you avoid the fee.
The bank won’t charge you if you’ve opted out of overdraft for ATM or one-time debit card transactions, but this is only for consumers and not business bank accounts.
It’s a no brainer that you should do everything you can to avoid overdrawing your account in the first place. But in the event that you find yourself dancing the line of a low balance and bills coming due, it helps to know how your bank will handle deposits and withdrawals.