Home > 2013 > Personal Finance

Overdrafts: Since When Did Megabanks Become Your Evil Stepmother?

Advertiser Disclosure Comments 1 Comment

Overdrafts: Since When Did Megabanks Become Your Evil Step-Mother?Veronica Gutierrez never asked Wells Fargo to act like her mother. The banking colossus just did it anyway. Here’s what happened. She bought some sandwiches at Subway for $11.27. Then she purchased car parts at Autozone and went grocery shopping. Twelve transactions into the billing cycle, she wrote a check for $65. It overdrew her account, which should have cost her an overdraft fee of $22.

But Wells Fargo didn’t order Veronica’s purchases chronologically. Rather, it took the liberty of reordering her purchases so the biggest ones came first. Instead of the Subway meal for $11.27, the bank’s reordering placed an $80 transaction at the top of the list.

The result: she ran out of money faster. Wells Fargo drained Veronica’s account nearly dry after just eight transactions. Every purchase after that just put her deeper in the hole.

This fancy footwork allowed Wells Fargo to quadruple its revenue from overdraft fees, from $22 to $88, according to an analysis by the Pew Charitable Trusts.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

When Good Parenting Goes Bad

Does that seem underhanded and sneaky? It sure did to Veronica, who filed a class-action lawsuit against Wells Fargo over the practice. The suit won $203 million in restitution for victims. In his decision, Judge William Alsup cited an internal Wells Fargo memo that predicted the bank would earn an extra $40 million a year in overdraft fees.

Free Credit Check & MonitoringIn reality, transaction reordering earned Wells Fargo “hundreds of millions of dollars” — just from its customers in California — between 2004 and 2008, according to the decision. “(G)ouging and profiteering were Wells Fargo’s true motivation” for changing the order of transactions from high to low, Judge Alsup found. “High-to-low posting was adopted exclusively to generate more overdraft fees and fee revenue at the expense of depositors.” Alsup’s decision was partly overturned on appeal in December, however, and the outcome remains uncertain.

Banks say this is not simply a new way to squeeze profits from unsuspecting customers. They claim that by processing the largest transactions first, they’re actually doing us a solid. They’re looking out for us, as a parent might look after a wayward child. (Thanks, Mom!)

“A high-to-low posting order has the advantage of ensuring that the most important payments (e.g., mortgage payments) … are paid first,” the Financial Services Roundtable, a banking industry trade group, said in a comment letter to the federal government last year.

The “Crystal Ball” Method of Budgeting

Suspend your disbelief for a moment, and consider this argument at face value. Assuming our newfound financial services fiduciaries aren’t reshuffling transactions to generate $23.7 billion in overdraft fees from us every year, but rather to help us protect our most important assets: our homes, cars and credit.

When I balance my checkbook, I don’t order payments from biggest to smallest, and I doubt I know anyone who does. We don’t have functional crystal balls, and we can’t always see every expense in advance. The entire reason folks balance their checkbooks and track their expenses in the first place is to make sure they have enough money in the bank for the purchase that comes next.

We track our expenses chronologically. But some banks have decided that’s the wrong way to do it. Rather than trust our judgments as adults to manage our finances and be responsible about balancing our incomes versus our expenses, some banks choose to treat us like children. Since our mortgage and car payments are some of the largest and most important payments we make, banks argue that they are merely assuring those big payments get made first.

[Related Article: Banks Still Raking In the Profits from Overdraft Fees]

In the best case that is called infantilizing… Worst case: gouging. When I write my mortgage check every month, I know for darn sure there’s enough money in my checking account to cover it. The same goes for my car payment. To do otherwise would be self-destructive.

Conversely, I can understand going over the limit on smaller charges. If I buy a pack of gum or a tank of gas when I know I’m close to my limit, but I think I can just squeak by, that’s a guess that we adults make. Often we’re right, sometimes we’re wrong. Few adults blow their paychecks on Furbys and remote-controlled helicopters. Either way, that’s our decision to make. (And for those who roll the dice and get snake eyes, they will suffer the consequences, including an average overdraft fee of $30 to $35.)

But banks don’t get to rule by the laws of “because I said so.” That’s a parent trap. Yet in the name of protecting us from ourselves, financial services institutions do exactly that. As of last summer, Bank of America, JPMorgan Chase, Wells Fargo and Capital One, among others, all processed at least some transactions from biggest to smallest.

Time for a Time-Out

Since our self-appointed financial guardians will not stop of their own accord, federal legislation is the only answer here. Provided it doesn’t get buried by the banking lobby, help is on the way. Rep. Carolyn Maloney (D-NY) plans to reintroduce legislation she first proposed last year to reform bank overdraft practices. Among other things, the bill would prohibit institutions from manipulating the order of transactions to maximize overdraft fees.

“While some banks have instituted more consumer-friendly overdraft policies — and they should be applauded — consumers need and deserve the uniform protections a federal statute can bring,” Congresswoman Maloney said in an email. “That’s why I’m planning to reintroduce my Overdraft Protection Act shortly.”

Consumers like Veronica Gutierrez don’t need banks to quadruple the amount of punitive fees they must pay, especially not under the motherly (or fatherly) assumption that banks know what’s best for you.

Rep. Maloney’s bill is a logical response, and I hope it becomes law during this session of Congress. It’s time to put a stop to the billions of dollars that banks are draining from consumers by way of sneaky overdraft fees.

Anyway, last time I checked, our mothers do what they do to protect us, not profit from us — that’s what evil stepmothers do.

[Free Resource: Check your credit score and report card for free with Credit.com]

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Jeanfor

    Wells Fargo is still doing that!

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team