The way banks process checks and debit transactions can trigger overdrafts

Fair or not?

August 17, 2010|By Eileen Ambrose, The Baltimore Sun

Holly Rhodes of Baltimore says she's willing to pay a fee if she overdraws her checking account, something she acknowledges happens a little too frequently.

But the 25-year-old complains that her bank processes her checks and debit card transactions in a way that's designed to wring out even more overdraft fees from her. PNC Bank clears transactions from highest to lowest — not in the order they occurred — so her account empties faster and more penalties are incurred. At $36 a pop, overdrafts can add up quickly.

Clearing transactions from high to low, triggering overdraft fees earlier, has been a controversial practice for years. Many major banks, including PNC, are being sued by customers for the practice. And pressure is mounting for those banks to change their ways.

Last week, a federal judge ruled that Wells Fargo & Co. manipulated the order of transactions to boost overdraft fees and ordered the bank to repay about $203 million to its California customers. Wells Fargo says it will appeal.

The Federal Deposit Insurance Corp. also proposed guidelines last week calling on banks to make sure they aren't processing transactions in ways that intentionally maximize fees. The agency, which is seeking public comment, suggested that banks process items in the order received or by check number.

"I'm all for getting penalized. If you drive fast down the highway, you get a ticket," Rhodes says. But with PNC clearing the biggest transactions first, Rhodes says, the family ends up paying several overdraft fees for debit transactions that are often less than $10.

Pittsburgh-based PNC declined to comment because of the continuing litigation.

Overdrafts bring in big bucks — an estimated $23.7 billion in fees for 2008 — and banks aren't likely to give up this revenue without a fight.

Plus, banks argue that clearing transactions from high to low benefits customers who want big items, such as the rent or mortgage payments, to be paid first.

But the order of processing transactions matters for consumers with cash-flow problems.

Say you have $100 in your account and make five transactions in this order: $5, 20, $30, $40 and $80. If the bank clears them as they occurred, you would owe a single overdraft fee, which usually runs about $35. But if transactions are processed big to small, you'd trigger four fees totaling $140.

"That's not a benefit to us at all," says Rhodes, a stay-at-home-mother. She and her husband are raising two children on a single income and often run out of money before the next payday. "We're always behind."

Linda Sherry, a spokeswoman with Consumer Action, acknowledges that "banks have to make money somehow," but adds: "They don't have to make it through deceptive and unfair practices."

Still, she says, consumers have a responsibility, too. "Just don't write a check when you don't have the money in your bank."

You can take other steps to reduce overdraft fees.

For example, starting this week banks must get your permission before enrolling you in an overdraft program for debit and ATM transactions. Don't opt in. Your transactions will be denied if your account is empty, but that's better than paying a $35 fee for a $3 cup of coffee.

Or you might want to switch banks if you pay more fees because the lender processes transactions from high to low. You can find banks and credit unions that clear the lowest transactions first or that process items in the order they come in, or by check number.

The Rhodes family very recently made changes to carefully manage their cash flow. "It wasn't easy," she says. But this month, for the first time in a long time, they avoided an overdraft.

Avoiding overdraft fees

•Bank online so you can keep an eye on your balance.

•Sign up for e-mail or text message alerts from your bank when your funds run low.

•Link your accounts so the bank can transfer money from savings to checking when funds run low. You would pay a fee, but it would be less than an overdraft charge.

•Apply for a line of credit to cover overdrafts. You'll pay interest on money used to cover overdrafts and possibly a fee, but that's still cheaper than overdraft fees.

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