How banks manipulate accounts and boost customers' overdraft fees

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As you tackle your holiday shopping list, be forewarned that your bank could be rearranging your debit card transactions, checks and other withdrawals in a way that ups the chances that you overdraw your account multiple times, racking up multiple fees.

It's a practice long decried by consumer groups, and one that continues to confound consumers.

"[People] think transactions are processed in the way you do them, but that's not necessarily the case," said Susan Weinstock, director of The Pew Charitable Trusts' Safe Checking in the Electronic Age project .

"We want to make sure banks are not doing things intended to simply maximize overdraft fees."

Traditionally, banks have processed checks, and more recently debit card transactions, from highest amount to lowest. They say they do it that way to give priority to customers' most important bills, such as mortgage payments.

That policy, however, tends to drain an account more quickly and trigger the most overdraft fees.

The Center for Responsible Lending likens the practice to "cooking the books" in favor of the financial institution.


Here's how it works: Say a customer starts with a $90 checking account balance and uses a debit card to buy a $5 latte, followed by $30 in gas and a $100 parka.

If the transactions were processed in that order, the latte and gas would go through, but the $100 parka would overdraw the account and trigger a typical $34 overdraft fee.

But if the bank reordered the transactions, processing them from high to low, the $100 parka would immediately put the account in the red and result in three overdraft charges totaling $102.

"We understand not everything comes in [to the bank] at the same time the consumer does it -- a check may be held for a while. But the idea is if the bank is doing something just to maximize overdraft fees, that should be prohibited," Ms.Weinstock said.

She said financial institutions should be required to process transactions "in a neutral way," such as chronological order.

The good news is that banks are starting to heed the call for change.

Some of the nation's biggest banks, such as Citibank, Chase and Wells Fargo, recently announced they will no longer reorder high to low for at least some types of transactions.

This summer a directive from the Federal Deposit Insurance Corp. took effect, warning banks that it supervises against purposely clearing the biggest transactions first. The directive applied to the nation's roughly 4,700 mostly smaller state-chartered institutions regulated by the agency.

Pew estimates that nationwide, 40 percent of deposit volume is no longer subject to reordering.

"We think it's time for the other 60 percent to come along," Ms. Weinstock said.

On the plus side, most banks process deposits and other credits to an account before subtracting debits, she said.

Among the top 10 banks in the Pittsburgh region, the top three -- PNC, Citizens and First National Bank of Pennsylvania -- said they reorder checks and debit card transactions to process them from highest amount to lowest.

Market leader PNC posts high to low because the largest transactions "typically represent the payments most important to our customers, such as their mortgage or auto loan payment," spokesman Fred Solomon said in an email.

"We offer numerous ways for customers to track their account balances, and customers can sign up for PNC AutoAlerts that warn them when their balances are low."

Spokeswomen for No. 2 Citizens and FNB, which is set to become the region's third biggest bank when it completes its take over of Monroeville-based Parkvale Savings next month, also said high-to-low ordering was based on the idea that customers wanted the biggest transactions processed first.

The area's seventh biggest bank, Huntington, also processes checks and debit card transactions from high to low. But an executive there said that soon might change.

"We're still in agreement with many of our customers that a chronological order based on transaction time and/or check number is the more logical approach," said Bryan Carson, senior vice president of deposit products.

But he said the bank was waiting for final guidance on posting order from big banks' main regulator, the Office of the Comptroller of Currency.

"We thought the final guidance would be provided in the fourth quarter of this year, but it's still not done," Mr. Carson said in an email last week. "We're waiting for that guidance before we make any changes because the technology investment is significant, and we aren't 100 percent sure our desired changes will align with their final guidance."

No. 4 Dollar Bank and No. 5 First Niagara both said they reorder checks from high to low, but process debit card transactions in the order they come in.

Among the rest of the top 10, First Commonwealth, Northwest Savings and ESB Bank employ policies that most closely match methods favored by consumer groups.

First Commonwealth said it processes checks by check number and debit card transactions from low to high, a policy the Indiana, Pa.-based bank implemented last year.

Northwest and ESB said they process checks and debit card transactions in the order they come in.

No. 8 S&T Bank issued a statement saying the bank "generally" processes checks based on the check number and debit card transactions according to the date and time. But the bank added that "the posting methodology employed varies depending on risk."

Ms. Weinstock noted that the surest way consumers can avoid being blindsided by a cascade of overdraft fees is to leave a cushion of money in their accounts.

Consumers also should ask their bank if it reorders transactions, she said. "Hopefully they will tell you."

In addition, Ms. Weinstock said people should think twice before signing up for overdraft protection on debit card transactions. Customers who don't opt in for coverage have their debit card transactions denied at the register if there's too little money in the account to cover them, instead of letting them go through and getting a fee.

In 2010, federal regulations kicked in requiring banks to get customers' permission before enrolling them in overdraft protection on ATM and debit card transactions. The opt-in requirement doesn't apply to checks, however.

Pew is pushing for the new federal Consumer Financial Protection Bureau to prohibit banks and credit unions from manipulating transactions in a way that maximizes overdraft fees.

The group also is urging banks and credit unions to adopt a standard, one-page disclosure box that outlines major checking account terms, including the order in which withdrawals and deposits are processed, so consumers can comparison-shop for a bank account . The proposed disclosure box can be seen online at .

The bureau "should require the box, like a nutritional label," Ms. Weinstock said.

"If you're on a low sodium diet, you can pick a can with the lowest sodium. You could pick a checking account in the same manner."


First Published December 11, 2011 5:00 AM


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