Banks aim to incur fees
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PITTSBURGH — Shoppers gathering last-minute holiday gifts should be forewarned that banks could be rearranging debit card transactions, checks, and other withdrawals in a way that increases the chances that their accounts will be overdrawn 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.
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.
Citibank, Chase, and Wells Fargo recently announced they no longer will 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 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.
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.”
The Block News Alliance consists of The Blade and the Pittsburgh Post-Gazette. Patricia Sabatini is a reporter for the Post-Gazette.
Contact Patricia Sabatini at: firstname.lastname@example.org or 412-263-3066.