Update: Bank of America settled a lawsuit for $410 million concerning this issue below.
In his documentary film Overdrawn!, Karney Hatch mentions that banks often post your deposits and withdrawals to your bank account in such a way that they maximize the possibility of overdrafts. Even if you believe you have a large enough balance to cover your withdrawals thanks to recent deposits, the banks have a way of calculating debits and credits that can result in multiple overdrafts in one day.
Here is how this works, supposedly. This is the scenario: you know that you have an automatic electronic withdrawal that will be executed today, perhaps to pay your mortgage or cable bill. You realize that you may not have the money in your account so you run to the bank and make a cash deposit to cover the withdrawal. Or perhaps you are aware of the impending withdrawal the day before, so you execute a transfer from one account to another online. In your scenario, the final withdrawal and deposit are executed on the same day.
According to experience with many banks, no matter what time your withdrawals and deposits are processed on any one day, the bank will apply your withdrawals first, from largest to smallest, then apply your deposits. So if you have $100 in your account at the beginning of the day, and you have instructions to pay your mortgage of $1,500, your cable bill of $75, a cash withdrawal at an ATM during the day for $80, a debit card purchase at the grocery store for $10, and a scheduled ACH transfer for $2,000, the bank will process your mortgage first, dropping your account below zero and incurring your first overdraft fee.
The bank will then reduce your balance by the amount of the cash withdrawal. Even though you’re already below zero the bank will charge you a second overdraft fee. Next, the bank will process your cable bill, resulting in the third overdraft fee. Your debit card purchase will be posted next, incurring an average fee of $30 for your $10 purchase. You’ve now been charged $120 in overdraft fees alone.
Finally, the bank will apply your deposit, bringing your account balance positive again.
This technique has been observed, and banks have even admitted to this practice. Yesterday, Consumerism Commentary reader Steve claimed that this is not the policy at Wachovia, nor is it the policy at most banks. So I called Wachovia, Wells Fargo, Citibank, Commerce Bank (TD Bank) and Chase to try to extract the official policies from the customer service representative or salesperson.
Here’s what I found, as of October 2008.
Wells Fargo’s policy is to always post ATM withdrawals first, regardless of the time the transaction took place. After ATM withdrawals are posted, deposits and other credits are posted from highest to lowest amount, and finally checks and other debits are posted from highest to lowest. Interestingly, if your starting balance is $0 and you walk into the bank at 9:00 am to make a cash deposit of $100 and at 2:00 pm withdraw $40 from the ATM, according to this policy you could incur an overdraft fee.
I don’t have complete faith in the answer I received from Citibank. The representative I talked to did not understand my questions at first and put me on hold for a long time, presumably to find someone who might know the answer, but returned with an answer that still did not match my questions. Eventually, she told me that cash deposits and ATM withdrawals are posted at the time of the deposit, but ACH and check deposits are posted first. Check payments are posted after all other deposits. It sounds like you’re in the clear with Citibank.
Chase will post your transactions to your account at the end of the day. The bank starts with deposits and ends with withdrawals, both from largest amount to smallest. This policy would avoid overdraft fees as long as at the end of the day you’ve deposited enough to cover your withdrawals.
Commerce Bank (TD Bank)
Like Chase, Commerce Bank (now TD Bank) will post your deposits before your withdrawals. The policy is slightly different. Rather than processing your checks paid from largest amount to smallest, they are posted in the order of the check number, low to high. Commerce Bank assumes you want check number 1001 to pay before check number 1002.
The customer service representative at Commerce brought up an interesting point. First, keep in mind that there is a holding period when you deposit a check. The funds you deposit may not be available on the same day, even if the amount of the check is included in the balance listed online. Additionally, cash deposits have “next day availability,” so even cash deposits won’t be posted to your account until the next business day. Furthermore, on Friday, they consider it to be Monday, The one-business-day rule then stipulates that cash deposits on Friday won’t be available in your account for use until Tuesday!
Like Steve mentioned, the customer service representative at Wachovia explained the policy quite clearly. Wachovia will post your credits first, from highest to lowest amount, and will then post your debits, also from highest to lowest.
According to each bank’s representatives, the respective policies have been in existence as long as they could remember. I would like to contact more banks, like Bank of America, Bank of New York, Capital One, and PNC Bank to determine their policy as well. If I do, I will update this article.
It’s interesting that each bank has its own method of posting items to customers’ accounts. I think this is a practice that should be standardized across financial institutions, and it should be done in such a way that it benefits the banking customer: all overnight credits (ACH deposits, Direct Deposits, checks coming off hold, late ATM deposits) first followed all overnight debits (ACH withdrawals, electronic checks) from lowest to highest amount at the start of the day, then all real-time credits (cash deposits, ATM deposits during business hours) followed by all real-time debits (ATM withdrawals, bank teller withdrawals, debit card purchases) from lowest to highest amount at the end of the day.
Having never worked in a bank, I’m not sure if this policy is feasible, but it would be fair to the customer and reasonable to the bank.
Updated August 19, 2016 and originally published October 28, 2008.