Nearly half of banks still "reorder" checking account transactions -- a practice that can dramatically increase overdraft fees by processing larger withdrawals first, leaving smaller transactions to pile up the fees -- one of a number of findings in a new survey by Pew Charitable Trusts.
The survey of 44 major banks looked at their checking account practices, including their efforts to increase transparency and make banking more consumer-friendly. Of the 44 banks only one -- Ally Bank -- came out with a perfect score.
Transaction "re-ordering" is among the most costly to consumers. This frequently results in draining the account balance more quickly and thus increasing the number of transactions subject to overdraft fees.
For example, a consumer who made a number of small debit card purchases during the day, and then wrote a big check that overdrew the account at the end of the day, would suffer just one overdraft fee (averaging $35), if the transactions were taken in chronological order. But, if the bank reordered the transactions to deduct that large check first, the consumer would be subject to additional fees. In the example cited in the study, the "reordered" consumer's overdraft charges would soar to $140 instead of $35.
This practice is particularly onerous for low-income consumers who have neither the wherewithal to maintain high average balances nor the clout to talk their banker into waiving fees. Pew maintains that overdraft fees, some of which are generated through reordering, are a key factor that is driving low-income consumers out of the traditional banking system.
Banks have argued that they reorder transactions to make sure that important payments, such a consumer's mortgage, don't bounce. However, Pew and other consumer groups maintain that those important payments are rare and the process is in place in order to boost fees. Still, of the major money center banks, only one -- Citibank -- never engages in this practice. The rest of the nation's biggest banks -- Bank of America (BAC
) , Chase (JPM
), Wells Fargo (WFC
) and Capital One (COF
) -- all reorder transactions at least part of the time, according to the Pew study.
The study also found that an increasing number of banks are imposing new limits on consumer rights when resolving disputes, and, while progress is being made with disclosures, one-third of big banks surveyed have yet to adopt summary disclosure graphics that cut through confusing checking account agreements, which average 44 pages in length, to highlight the key terms.
"Checking accounts are a fundamental tool for managing money and they need to be safe and transparent," said Susan Weinstock, director of Pew's safe checking research. "We urge the Consumer Financial Protection Bureau to make fair checking account practices a priority by issuing new rules."
Additionally, 70 percent of the surveyed banks require customers to take disputes to binding arbitration rather than court. A year ago, just 58% of banks put terms in their checking account agreements that limited their customers' ability to take disputes to court. Some banks have added additional wording that bars their customers from joining class action suits, too.
On the bright side, banks have become better about disclosure, with two-thirds adopting summary disclosure graphics to highlight key terms. Less than half follow what Pew considers best practices, however, that spell out a complete listing of the terms and conditions in an understandable format.
The bottom line is that progress is being made, said Pew's Weinstock. Still, she urged the Consumer Financial Protection Bureau to write rules assuring that every consumer -- no matter where he or she banks -- has access to a safe and transparent checking account.
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