“Transaction Sorting” Maximizes Overdraft Fees for Banks

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With the new credit card laws about to go into effect, banks are scrambling to replace the usurious income they used to be able to generate through late fees and sudden high interest rates. Overdraft fees on checking accounts are now being referred to in the banking industry as the “motherlode”. The method for maximizing these fees is called “transaction sorting”, a process where banks can clear charges in any order they choose to generate the maximum number of overdrafts.

For instance, lets say you have a $35 balance in your checking account, and pending checks and debit card transactions of $15, $10 and $100. Even if the transaction dates of the $15 and $10 charges precede the $100 check, the bank can choose to clear the $100 check first. Clearing the transactions out of order will result in three overdraft charges instead of one, or $90 versus $30 in fees. In short, the bank took things out of sequence to make more money.

According to a ABC news story, the banking industry defends transaction sorting – now standard practice at many banks – as reflecting the preferences of most consumers. Really? Customers would rather pay more in fees? I want to know what they’ve been smoking.

I agree that people shouldn’t be bouncing checks. But what if someone is using a debit card – don’t tell me that during the debit card computerized approval process that the account balance isn’t known at that moment of the charge. Why should a debit transaction be authorized if there are insufficient funds? I’ll tell you why – so the bank can charge $30 in fees when someone mistakenly charges a $5 hamburger against a zero balance.

On a Nightline story aired on July 8, 2009, reporters interviewed economist Mike Moebs of Moeb$ Services, an economic research firm. Moebs said that the banking industry is making over $37 billion in overdraft fees from consumers and small business last year. In comparison, he said that in 1992 it was only $11 billion – three times higher than 17 years ago. Mr. Moebs projected that next year it is expected to be $39 billion. Moeb also pointed out that the government did bailouts (our taxpayer money) for the same Wall Street banks that are charging outrageous overdraft fees.

I’ve personally been a victim of transaction sorting. I used to have “overdraft protection” with my bank, who suddenly discontinued this feature on my checking account without notifying me. I was charged $120 in overdraft fees dued to a bounced check that I deposited from someone else. To add insult to injury, the bank charged me for the other person’s bad check as well. If I hadn’t had that same account for 15 years, I would have closed it.

Has this happened to you? Tell us about it!

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