Banks say they hate bad checks. But they make a lot of money on them. It's estimated that profits from bounced check charges top $5 billion a year. So as crazy as it sounds, a system that creates more bounced checks is really good for the bank's bottom line.
Jim Menke is an accountant, so he's pretty good with numbers. Bouncing checks is not something he likes to do. And, as he puts it, "if I do write a bad check, then I definitely want to pay my penalty. But I don't want to be gouged or taken advantage of."
That's just how Jim felt when he went to his bank in Cedar Crest, New Mexico, and was told his checking account was overdrawn. The charge: $120.
Jim couldn't believe it, so he asked to see his statement. "I noticed that all the bigger items cleared first," he recalls. What did the people at the bank say when he questioned this? "They said 'no, we clear everything randomly'," he says.
But that wasn't right. As Jim discovered, his bank, like a lot of banks around the country, use a system called "high to low check processing." Rather than process checks in numerical order, or by the date they were received, the bank's computers are programmed to handle the biggest checks first.
Jean Ann Fox, of the Consumer Federation of America, explains: "Banks have figured out that if you clear the biggest check first, you can wipe out a consumer's balance in their account, then all the smaller checks that come through the same day can be bounced."
That's just what happened to Jim Menke. He bounced six checks. If the bank had cleared the checks lowest to highest, he says, he would have bounced just one.
Menke hired a lawyer and sued the bank, claiming it had used "deceptive practices."
Philip Gaddy, his attorney, says the bank did not tell people about this, "and that probably is my biggest complaint."
Gaddy claims the banks that have switched to high to low check processing have only one reason to change: to boost profits by bouncing more checks. "The banks that I'm familiar with actually calculated how much more money they would make," Gaddy says.
His evidence is a First Security bank memo. It says a 1988 corporate decision to pay the biggest checks first resulted in a "net gain to the corporation" of "approximately $1.5 million annually." And, the memo says "that net gain has continued to increase each year."
Janet Eissenstat, of the American Bankers Association, responds, "There's not a bank in the country that would prefer a bad chec over a good check."
The nation's bankers say they can use any system they want to process checks. And they make no apologies for using the high-low payment method.
Says Eissenstat, "You know, if you want to avoid fees, the easiest way to avoid fees is to simply make sure the money is there when you write the check."
Vicki Mayhew, a bank customer, sees it differently: "They act like they're doing you a favor by paying the larger check," she says, adding a sarcastic, "Yeah, right."
The banks say most people want them to pay the bigger checks first, because those tend to be the most important ones, like the rent or the mortgage.
But Vicki and Mike Mayhew say no one at Norwest Bank asked them how they wanted their checks handled. So they've joined a number of unhappy customers who've sued the bank.
Mike explains, "I feel like I'm being used and I don't like it at all. Makes me angry."
According to the Consumer Federation of America, the banks have it all wrong. A nationwide opinion poll conducted for the Federation last spring shows that only 13 percent of those surveyed said they wanted their bank to pay the biggest checks first. Nearly two-thirds of those surveyed want their bank to process their checks in the order in which they were received.
What can you do?
- Ask your bank how they clear checks. You may need to speak to a supervisor rather than a teller.
- Be careful about electronic deposits and withdrawals, which make it easier than ever to write a bad check.
- Get overdraft protection. It costs extra, but it could be a better bargain than a lot of bounce check fees.
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