Account Activity

Ever been charged more than one overdraft fee and think the bank has its math wrong? Well, you might be on to something.

President Obama’s Consumer Finance Protection Bureau unveiled plans today to learn more about the way banks charge overdraft fees. The agency launched an inquiry asking banks for data about its overdraft practices.

Initially my reaction to the inquiry was: Didn’t we already go through this with the CARD Act? Under it, the Federal Reserve required banks to make customers opt into programs that allow them to overdraft on their accounts. If you haven’t opted in and you don’t have enough in your checking account to cover your purchase then your transaction is denied at the cashier’s counter. Embarrassing maybe, but it’s better than owing your bank $35 for a $3 cup of coffee.

So now here we are two years since the CARD Act and the CFPB wants to re-visit the overdraft issue. That’s exactly what critics of the agency (and there were many) were afraid it would do. When the agency was first announced by the Obama administration many argued that it would just be another layer of regulation for financial firms that were already being regulated else where. Banks for instance already have the Federal Reserve they answer to.

But consider one of the areas the agency wants to explore regarding overdraft fees:

• Transaction Re-ordering that Increases Consumer Costs: The CFPB is concerned that overdraft practices employed by some financial institutions increase consumer costs. One such practice is commingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first. This maximizes the number of transactions that will trigger an overdraft fee. The CFPB will examine how prevalent this practice is and how it impacts consumers.

Essentially the CFPB has a hunch that banks are manipulating the order of your daily transactions to maximize the chances you’ll be charged an overdraft fee. Here’s an example: Say you’re a student with $50 in your account. You make 3 consecutive purchases for $10 each. That leaves you with $20, but you still need to buy a $40 book for class that evening. You decide to swipe your debit card anyway under the assumption you’ll be charged a $35 overdraft fee just once.

The CFPB says some banks will wait until the end of the day to deduct your daily purchases and start with the biggest purchase first. In this case, the $40 book is deducted first leaving the student with $10 then the three $10 transactions are deducted. That allows the bank to collect and overdraft fee two times instead of one.

So while your own banking calculations might be chronological, the banks are ordered to maximize fees. Here’s CFPB director Richard Cordray talking about transaction re-ordering at Hunter College today:

Because of transaction ordering, along with the vagaries of funds availability and the settlement of various types of debits, consumers may not know when they have reached the limit of their available funds. Therefore, it is easy for them to overdraw their accounts inadvertently. We have heard many stories about the $40 cup of coffee: a man swipes a debit card at his local coffee shop, and unbeknownst to him, his balance is too low to cover the cost. Rather than the card being declined (with the result that he either pays in cash or goes uncaffeinated), the small transaction is processed – along with a $35 overdraft fee.