Recently a number of leading banks have been hit with lawsuits accusing them of ripping off consumers by playing around with transaction dates and charging questionable overdraft fees. The (alleged) schemes are surprisingly simple and worryingly effective, and require only a little math to explain.
A number of banks have been accused of re-ordering transactions in their favor.
Watch closely to see if you can find the trick: Imagine you have an account with a $200 balance. You have a debit card from Bank X, and an overdraft protection plan as part of the package. You know that if you go into your overdraft, you’ll be charged a $30 fee.
In a single day, you make five purchases, paying with your Bank X debit card - $10, $15, $20, $25 and $30. You still have $100 in your account. Finally, you make a $150 purchase. Yes, it pushes you over, and yes, you’ll be charged $30, but life happens, and sometimes we all overspend. It’s only $30, anyway.
Well, maybe not. A number of banks, including Bank of America, Citibank, Wells Fargo, Chase and various regional banks, have been accused or re-ordering transactions in their favor, bringing about multiple overdraft fees.
It goes like this: at the end of the day, Bank X processes your transactions. But – watch carefully – they move the $150 to the top of the pile, subtracting the funds from your account. Now you only have $50 let to pay off the day’s earlier purchases. The $30 is processed, then the $25, and suddenly you’re overdrawn – leaving the $20, $15 and $10 transactions each subject to an overdraft fee. The $30 fee has suddenly become $90, and overdraft protection suddenly doesn’t seem so helpful.
Following an October 2011 lawsuit, four banks - Zions Bank, Amegy Bank NA, National Bank of Arizona and Vectra Bank Colorado NA – have now agreed to contribute to a $10 million settlement to compensate consumers who lost out to the ‘high-to-low’ re-ordering schemes. The banks will now be released from any future liability for transaction charges in the class period – in this case, October 2005 until the date of the suit’s filing. For bank customers, the $10 million will mean an 85 cent return for every dollar they lost in unfair charges.
The original suit was filed by Melinda Barlow, who cited a Zions Bank agreement dating to 2005 in which the bank stated that charges would not be processed in any particular order. Arguing that the bank had actually given preference to larger transactions, Barlow claimed that the bank was deliberately manipulating customers’ accounts in order to charge multiple overdraft fees.
Florida-based Mashall & Illsley Bank and Michigan-based Citizens Bank will contribute $4 million and $2 million respectively for changing the order of customers’ transactions and assessing late fees unfairly.
Since a new federal act passed in 2010, banks have been required to get customers to opt in to overdraft protection plans, in an attempt to limit companies’ ability to charge fees. Many consumers still choose the plans, however, because of the ease and peace-of-mind offered by knowing transactions will be honored. The cost, however, may be more than many are expecting, and unfair overdraft fees continue to plague American consumers.