Lawsuit shows what we know: Banks' overdraft scheme motivated by greed
Banks insist that clearing debit card transactions from largest dollar amount to smallest rather than by chronological order or check number is justified and even preferred by customers.
But internal bank communications released as part of a lawsuit indicate the real motive is profit.
The previously confidential internal documents from Union Bank of California were the first to be made public in a consolidated suit of more than 30 banks.
Similar legal actions against high-to-low clearing order have been brought against Bank of America, JPMorgan Chase, Citigroup, Fifth Third and other banks, some of which have been settled out of court.
Here's the problem with high-to-low clearing: If you have $100 in your checking account and make four debit card transactions during the day, three for $10 and a final one for $110, processing small transactions first will result in a single overdraft charge, while processing the large one first will result in four overdraft fees.
The Consumer Federation of America blasted the practice in a 2010 report, but it took a $200-million court judgment against Wells Fargo to fill the Fed's inbox with calls for reform.
The FDIC has already instructed its banks to clear debits either by chronological order or check number. The new Consumer Financial Protection Bureau is widely expected to ban the practice entirely.
American Banker reports that the internal communications within Union Bank show that its bankers were well aware of the moneymaking potential of the clearing order when it hired CAST Management Consultants to begin the process back in 2002. In exchange, the bank agreed to give CAST 20% of the extra overdraft revenue.
Some execs were deeply troubled by the concept; others were more concerned with keeping the bank's true motivation a secret.
In a 2003 email to colleagues, bank executive vice president William Christensen wrote: "Well, as a UBOC shareholder (and a consumer), I would STRONGLY disagree with the high-to-low approach. I don't believe that UBOC (Union Bank) has ever done this before … I don't think the bank ought to do anything that encourages a class action lawsuit right now."
Another bank employee wrote: "We should … burn all our documentation that (says the only purpose of reordering payment) posting sequence = more fees."
Despite some initial misgivings, the bank moved ahead. The first year alone, its overdraft revenue jumped by $33 million.
Last year, Union Bank dropped high-to-low clearing, largely due to the class action. It now uses low-to-high, which is still not one of the two protocols recommended by the FDIC.
Let's hope the embarrassment resulting from its outright chicanery will shame all American banks into ending this scam.