Re-ordering Transactions: A Costly Overdraft Abuse


Is your bank cooking the books?
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What makes “overdraft protection” a racket?

A monthly fee to use your debit card is one thing. A system that manipulates customer account transactions to boost $34 overdraft fees... that’s another.

Bank of America has joined Citibank in ending high-cost, fee-based overdrafts for debit card transactions. They will only let such transactions go through if their customers have linked their checking account to a savings or line of credit—a good move for consumers.

Check out this Q&A on why debit card denials are a good thing.

But many banks and credit unions are still automatically approving all debit card transactions and charging a fee typically over $30 for each transaction made while the customer is overdrawn (even if by a very small amount).

Protection? Hardly. This is a big fee generator for financial institutions and a costly feature for consumers, only partially relieved by a rule requiring customer consent.

Reordering transactions: how banks multiply unfair fees

When your bank or credit union balances your checking account at the end of each day, do they subtract purchases and payments from your account in the order you made those transactions? Fair enough. But if they subtract the highest dollar amount first, then the next highest, down to the lowest, you may have a problem.

Manipulating the order of your transactions makes it appear that charging you extra overdraft fees is justified. It’s like when corporations “cook the books,” playing with the numbers to appear more profitable to investors. Only in this case, they’re frying your checking account!

Transaction shuffling is one of the abusive overdraft practices that have spread like wildfire through our banking system in the past decade.

The good news: lawsuits and public pressure are making some financial institutions back off.

How does high-to-low reordering work?

In a day’s time, you may have several transactions that draw money out of your checking account. If your balance dips below zero, your bank or credit union may charge you a $34 fee (the average overdraft fee) for each transaction while you’re in the negative.

If the bank or credit union is “cooking the books,” or subtracting the largest transaction from your account first, then the next largest, on down to the smallest, you will dip below zero faster, so they can charge you more of those $34 fees.

An example. Imagine you start the day with $90 in your checking account. You use your debit card five times, and your last purchase of the day puts you in the negative. One $34 overdraft fee is already a heavy penalty. But if your bank cooks the books, you pay a lot more:

Scenario A

Under A, your $100 clothing item came out of your checking account last, so there was enough money in your account to cover the previous expenses. You were charged one $34 fee.

Scenario B

Under B, the bank subtracted the largest item first -- $100 for clothing -- even though that transaction actually occurred last. With high-to-low ordering, the actual order your transactions occurred in doesn’t matter. The largest comes out first, which leaves less money in your account to cover the smaller ones. Thus, the books are cooked, the bank is happy, and you are stuck with huge, multiple fees.

Debit/Overdraft News

Overdraft Fees at Banks Hit High, Despite Curbs 
Wall Street Journal 02 Apr 2014

Huntington Bank Winding Down Overdraft Fees 
Charleston Gazette (West Virginia) 19 Mar 2014

Indiana Attorney General Going After Mortgage Bailout Scammers 
Fort Wayne News-Sentinel (IN) 03 Feb 2014

Hefty Bank Fees Waylay Soldiers 
Wall Street Journal 16 Jan 2014