Released: November 20, 2006

Check-clearing policies create overdrafts

Source: Kathy Chu, USA Today

As we write checks and use our debit cards this holiday season, banks are forcing some of us to overdraw more often by clearing the largest transactions first, instead of processing them in the order they come in. Eight of the nation’s 10 largest banks — Citigroup, Bank of America, Chase, Wachovia, Wells Fargo, HSBC , U.S. Bank and SunTrust — typically pay checks that arrive on the same day from the largest to smallest dollar amount, according to USA TODAY research. Most large banks do the same with electronic transactions, according to a review of deposit agreements and conversations with the banks.

The order in which banks process checks and other debits determines the overdraft fees they charge. Those fees make up 90% of service charges on deposit accounts, and they’re expected to yield a record $53.1 billion for financial institutions this year, research firm Moebs Services says.

Banks have been increasingly relying on fees because in recent years the gap between the money they earn on products such as mortgages and what they pay out on deposits such as CDs and money market accounts has narrowed.

A disproportionate number of these overdrafts occur from November to January, because, “People are going out more and buying more,” says Michael Moebs, founder of Moebs Services.

Here’s how high-to-low check processing works: Say you have $50 in the bank. And suppose three checks come in on the same day: for $20, $15 and $45. The bank would clear the $45 one first. That way, it could charge you a fee, of up to $35, for each of two checks bouncing. If it had cleared the lowest-amount check first, you’d incur only one bounced-check fee.

Critics denounce this practice, saying it boosts fee income to banks at the expense of low-balance customers who can least afford extra fees. A handful of states, including New York, have passed laws requiring banks to specify the order in which they clear transactions.

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