Deposits and Withdrawals: Do Banks Trap You Into Overdraft Fees?
The documentary Overdrawn! explores the ways that major national banks practice predatory lending, particularly in the form of overdraft fees. Since its 2007 release, things have changed at least somewhat for the better.
In late 2017, Bank of America settled a long-running class action lawsuit on this specific issue. They agreed to pay $66.6 million to settle the suit.
Basically, Bank of America was accused of using overdraft fees to collect exorbitantly high interest rates from customers who let their accounts be overdrawn for several days. By allowing customers to overdraw their accounts in the first place, the bank was essentially making the customers a loan. And then they were charging incredibly high interest rates–in the form of fees–on that loan.
High-profile lawsuits like this one may mean banks are changing the way they charge overdraft fees. But they still haven’t completely changed the way banks can make decisions about your withdrawals and you may still be hit with multiple fees.
Of course, you definitely want 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 these scenarios. That way you can understand whether or not you’re effectively being trapped into getting hit with multiple overdraft fees in the same day.
To understand exactly what we’re talking about here, let’s set up a scenario.
You know you have an automatic withdrawal hitting your account today to pay your mortgage. You know you don’t have quite enough in the bank to cover the withdrawal, so you run in a cash deposit or make a transfer from a connected account online. The deposit and withdrawal are on the same day, so the automatic withdrawal should be covered, right?
Maybe not. Instead of processing the deposit first and the withdrawal second, many banks will process all withdrawals first–from largest amount to smallest–and then they’ll process your deposit last. So rather than getting hit with no overdraft fees, you could get hit with three separate fees.
Is That Even Allowed?
Unfortunately, yes. According to the Federal Reserve, federal law doesn’t regulate the order that banks post checks to your account. Some bank computer systems are meant to process the largest to the smallest transactions for the same day. The Federal Reserve says that banks do this on the assumption that the largest payments you make are more likely to be the most important.
With that said, you can protect yourself from these types of predatory practices by opting out of some overdraft protection. The Federal Trade Commission says that you have to specifically opt-in to overdraft protection. If you don’t have the funds to pay for a transaction, overdraft protection will let it go through but charge you a one-time fee. If you don’t opt-in to this service, your transaction will just be declined.
Keep in mind, though, that this doesn’t apply to recurring, scheduled transactions. In these cases, banks can usually enroll you in overdraft protection plans without your express permission. So scheduled transactions can overdraw your account and you’ll be charged a fee.
Understand How Your Bank Works
Obviously banks don’t clearly advertise these potentially predatory practices. But it can be helpful to know how your bank deals with transactions. We checked out the policies of six banks to get a feel for differences in how banks deal with deposits and transactions.
Wells Fargo used to post ATM withdrawals first, and then deposits and other credits from highest to lowest, and then checks and other debits from highest to lowest. So in the above scenario, you would have been fine. But you had to be extra careful with withdrawing cash from the ATM.
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 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.
One way to avoid overdraft fees with Citibank is to sign up for its Safety Check service. With this service, your checking account is linked to a savings or Money Market account. If you’re going to overdraw, Citibank can automatically transfer money from your savings account to cover the overdrawn amount, rather than charging the insufficient funds fee or overdraft fee.
Chase’s online documentation provides a similar outline. It processes withdrawals and deposits like this:
- Adds outstanding deposits to your account.
- Subtracts 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 the transactions come in.
- Subtracts other items, including checks deposited or cashed elsewhere from the highest to the lowest dollar amount. Although they say they can re-order these transactions in certain states.
Chase also offers some overdraft protection. For one, it won’t charge a insufficient funds fee if your balance at the end of the day is overdrawn by $5 or less, or if the item that causes the overdraft is $5 or less. But if your account is overdrawn for five or more consecutive business days, even if it’s only overdrawn by $5 or less, they’ll charge an additional $15 fee.
Commerce Bank (TD Bank)
As of April 2016, TD Bank changed its standard order of processing. It now processes transactions, including pending transactions, in chronological order. However, checks that are cashed or deposited at another bank are batched and processed at 11 p.m. on the date that TD Bank receives notice of the check.
TD Bank does offer some overdraft protection services, though. You can link an account to your checking account, and for a $10 fee, TD Bank will transfer money to cover your overdraft. However, if you make a deposit to bring your balance back to the black before the end of the business day, you can avoid even this $10 fee.
Huntington operates on the idea of a 24-hour deposit day. Any deposit you make before midnight will count as a deposit for that calendar day. This means if you deposit cash at any time, the deposit is considered as made in the calendar day you deposit it, even if it’s after business hours or not even a business day. Check deposits are processed for the next business day, though. However, some deposits may have a hold placed on them. You can see that full policy here.
Huntington seems to process transactions in calendar order based on when they come in. But they also offer a 24-hour grace period. If you overdraw, you’ll get charged the fee. But if you bring your account balance back to the black within 24 hours of withdrawing, the fee will be refunded.
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, according to this document:
- 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 preauthorized transfers in order from the highest to the lowest amount.
- Finally, the ban will apply any fees, including 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 overdrafts.
The bottom line here, of course, is that you should do everything you can do 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.