Banks Force Consumers into Overdrafts

(MoneyWatch)  Ever wonder why fee income and, particularly, overdraft fees have soared at the nation's banks? A number of former Bank of America employees charge that banks boost the odds that you'll pay costly overdraft fees--and lots of them--by "reordering" your checks and debit card transactions.

What does that mean? You use your debit card four times during the day, buying a $2 cup of coffee; a $5 sandwich; spend $25 on gas for your car and $30 for a few groceries. All these things happen early in the day when you know you have at least $100 in your account because you checked your balance on line before you went shopping. Late in the day, you pay the gardener $100, knowing that you're getting paid in the morning.

You don't expect the gardener to rush into the bank. He does. Your mistake. You think, "Okay, stupid me. The gardener cost me $135 this month because I'll have to eat an overdraft fee." Ah, no, naive consumer. You'll face four overdraft fees, making your momentary $62 overdraft a $140 bonanza for the bank.

How did that happen? Your multiple debit card transactions and the check all "clear" at the end of the day. It doesn't matter that the four small transactions happened early in the day and the gardener cashed your check 5 minutes before the bank closed. The bank can see the times, but has a policy of clearing checks and debits based on size, not when they happened.

Excuse me? You heard right. The biggest transactions are cleared first. That means that the multiple little transactions you made earlier in the day cause multiple overdraft fees. That $2 coffee just cost $37. The sandwich, $40. It sounds like a scam, but it's perfectly legal and probably spelled out in the fine print of your banking agreement.

It's worth mentioning that while Bank of America denied most of the allegations in the employee suit, which was reported today in the Los Angeles Times, it didn't deny this one. In fact, the bank acknowledges that it does this and most big banks do the same.

Bankers say that clearing your biggest transactions first is a consumer-friendly practice because it cuts the chance that big and important payments, like your mortgage, will get bounced because you failed to account for the cost of your morning cup of coffee. The fact that this vastly boosts the bank's fee income by creating multiple overdraft fees for one mistake? Coincidence. Or, it may be a way for banks to profit, even when their loan portfolios are sinking, according to a recent story in the Washington Post.

Of course, you the consumer, don't get to determine the order in which your checks clear. You don't have the right to say: "Bounce the mortgage check if I didn't account for it." You are a slave to the details of your bank's internal policies.