As we write checks and use our debit cards this holiday season, banks are forcing some of us to overdraw more often by clearing the largest transactions first, instead of processing them in the order they come in.
Eight of the nation's 10 largest banks — Citigroup (C), Bank of America (BAC), Chase (JPM), Wachovia (WB), Wells Fargo (WFC), HSBC (HBC), U.S. Bank (USB) and SunTrust (STI)— typically pay checks that arrive on the same day from the largest to smallest dollar amount, according to USA TODAY research. Most large banks do the same with electronic transactions, according to a review of deposit agreements and conversations with the banks.
The order in which banks process checks and other debits determines the overdraft fees they charge. Those fees make up 90% of service charges on deposit accounts, and they're expected to yield a record $53.1 billion for financial institutions this year, research firm Moebs Services says.
Banks have been increasingly relying on fees because in recent years the gap between the money they earn on products such as mortgages and what they pay out on deposits such as CDs and money market accounts has narrowed.
A disproportionate number of these overdrafts occur from November to January, because, "People are going out more and buying more," says Michael Moebs, founder of Moebs Services.
Here's how high-to-low check processing works: Say you have $50 in the bank. And suppose three checks come in on the same day: for $20, $15 and $45. The bank would clear the $45 one first. That way, it could charge you a fee, of up to $35, for each of two checks bouncing. If it had cleared the lowest-amount check first, you'd incur only one bounced-check fee.
Critics denounce this practice, saying it boosts fee income to banks at the expense of low-balance customers who can least afford extra fees. A handful of states, including New York, have passed laws requiring banks to specify the order in which they clear transactions.
"There is no excuse to process the transactions this way," says Jean Ann Fox of the Consumer Federation of America. "The only reason is to charge more fees."
Banks concede that this policy can cause people to pay higher fees. They explain that they want to give priority to their customers' largest checks.
"Their mortgage payment is the last check they want to bounce," says John Hall, spokesman for the American Bankers Association. "There are severe penalties and embarrassment."
Sean Tucker, 29, would rather have his items paid in the order they come in to the bank. In September, Bank of America charged him six overdraft fees, totaling nearly $200, for debits and checks that started at $3.33. Tucker says he found it "strange" that the bank cleared debits and checks from highest to lowest dollar amount.
"That suggests they've got some system to extract as many bounced-check fees as possible," says Tucker, of Falls Church, Va.
Diane Wagner of Bank of America says she can't comment on Tucker's case but says, in general, "Customers prefer to have transactions processed from high to low."