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When You Need $128 to Have No Money

by Julie Siwicki of the Financial Access Initiative

“Wow, the consumer knows about that?”

This was essentially how a banker responded when I told him the story of a woman I interviewed for the US Financial Diaries study. The participant – we’ll call her Jenna – was charged four $32 overdraft fees in the same day ($128 total, if you’re counting).  Jenna explained to me that if her bank had processed her transactions in the order she had made them, there would only have been one charge. Instead, the bank posted her largest purchase first, which was enough to take her account balance below $0. That triggered the initial $32 fee, and then three smaller debit card swipes she’d made earlier in the day each prompted fees as well.

It was clear to me, from Jenna’s and others’ stories, what was going on: Some banks manipulate the order of transactions to make more money from overdraft fees. It was clear to Jenna, too. But until I heard the banker’s response to her story, I hadn’t thought that banks would try to dupe their clients over this practice. Yes, “the consumer knows about that”! To those living on the margins of their account balances, these matters don’t go unnoticed.

Financial institutions have some leeway surrounding their overdraft fee policies. When there aren’t enough funds in a consumer’s bank account to cover a purchase, banks have two options: front money to process the payment, or deny the transaction. Overdraft it or bounce it.

What would your bank choose?

My guess is that not many people know the answer to this question. I certainly don’t. If I had to make a prediction, I’d say my bank would overdraft my account because banks make more money off overdraft fees. Among large banks surveyed by the Consumer Financial Protection Bureau, overdraft charges made up at least 61% of annual fee revenue in 2011.

The CFPB is familiar with stories like Jenna’s. Their recent white paper finds that policies controlling the order of posted transactions “vary considerably from institution to institution.” In fact, they uncovered a “striking” amount of variation in bank policy and consumer outcomes surrounding overdraft fees in general. It remains to be seen what the emerging bureau can and will do to regulate this realm of banking. For now, banks may do well to consider clients’ trust, loyalty – and maybe even their potentially fragile financial situations – before trying to squeeze money out of them on the sly.

Related link: For a very irreverent take on this problem, watch this video. (Warning: NSFW because Louis C.K./profanity.)

This post was written by Julie Siwicki of the Financial Access Initiative. The views expressed therein are those of the author, and not necessarily of the USFD project or its funders.