Read: Documents Reveal One Bank’s Plan to Squeeze Customers for More Overdrafts
In recent months, rules from the Federal Reserve have made it harder for banks to impose hefty overdraft fees when customers try to make debit transactions or ATM withdrawals without enough money in their checking accounts.
Before the rule change, banks could automatically sign up customers for what they often referred to as overdraft coverage or overdraft protection. The so-called “protection,” it’s worth emphasizing, isn’t from overdraft fees themselves—it’s from the potential embarrassment or hassle that comes when a transaction is rejected due to insufficient funds. The “protection” also allows the bank to collect hefty fees for covering such transactions.
But if the past is any indication, banks will go to great lengths to protect those fees, which are big business. As the New York Times recently reported, banks make more on those fees than they do on penalties from credit cards.
To give a glimpse of just how hard banks have worked to keep overdraft fees flowing, we review some internal e-mails and memos from earlier in the decade that Wells Fargo turned over in response to a class-action lawsuit in federal court in San Francisco. The documents—which we’ve loaded into our document viewer— sometimes veer into banker-speak, but we’ve tried to translate as needed.
“We are currently analyzing the change in frequency of overdrafts,” Wells Fargo Executive Vice President Ken Zimmerman wrote in an April 2005 e-mail. The cause for concern at the time? An unexplained decline in revenue from overdrafts.
Zimmerman noted in a later e-mail that they’d analyzed the decline and “if there is good news to be had,” it is that it was probably due to “increases in both the volume and size of tax refunds.” The tax refunds, especially when directly deposited to consumers’ bank accounts, had provided an additional cushion of cash that protected many consumers from overdrawing their accounts for a period of time, but customers would eventually resume “normal OD [overdraft] behavior” after the “excess balances are depleted.”
This was good news, according to Zimmerman, because it defied the bank’s earlier suspicions. Several years before, Wells Fargo began to re-engineer the way it processed checking transactions in order to maximize the number of overdraft fees it could charge consumers. The bank was afraid that the small segment of customers that overdraft the most—the “high-OD customer segments”—would notice and react.
“Given our dependence on a small set of OD consumers (4% generate 40% of total OD/NSF revenue),” Zimmerman wrote, “a small change in behavior within this group can cause a large change in revenue.”
What Wells did is by now well known: It engineered its processing of transactions to mix together different types of transactions—debit-card purchases, checks, and automated clearing house transactions—and reordered each transaction to be processed from the largest to the smallest at the close of every business day.
The changes, referred to as “Sort Order Optimization” and implemented in 2001, were intended to maximize the number of fees potentially incurred by the smaller transactions that would be processed later. An August 2002 bank memo marked “HIGHLY CONFIDENTIAL” shows that this initiative was projected to boost Wells Fargo’s fee revenue by more than $40 million annually.
The bank had also extended what it called a “shadow line” of credit to consumers using debit cards or making ATM withdrawals, triggering more fees where previously these transactions would have just been declined. These initiatives, as part of a series of changes, were expected to together generate an additional $138 million in overdraft revenue for the bank each year, according to the bank’s memo.
For Wells Fargo, boosted revenues weren’t the official rationale, of course. One bank document explained that the changes in posting order would yield the following benefits to consumers:
More of a customer’s high dollar items will be paid, which we believe are the transactions a customer feels are most important (e.g., mortgage or rent).
In court, U.S. District Judge William Alsip didn’t buy the bank’s arguments. In a 90-page ruling against Wells Fargo, he said the bank had acted in bad faith and that its “true motives” for re-engineering its processing of transactions were “gouging and profiteering.” The ruling came down on August 10—the same day Wells Fargo told investors that the Fed’s new rules on overdrafts would cost the company $500 million in fee revenue.
A Wells Fargo spokeswoman told me that the company is disappointed with the judge’s ruling and is appealing the decision. “We believe Wells Fargo’s method of processing transactions has been appropriate and consistent with customer’s interests and the laws and rules of governing regulatory authorities.” She also said that Wells Fargo—like many banks—offers a type of overdraft program that lets consumers link checking accounts to eligible credit cards or savings accounts to cover overdrafts, and the fees for this type of protection are typically smaller than the standard overdraft fees.
Several months have passed since the ruling against Wells Fargo and the implementation of the Federal Reserve’s new overdraft rules, but as TIME magazine notes, statistics on how many consumers have signed up for the banks’ “overdraft protection” vary depending on who you ask.
Consumer Reports—which has told consumers, “Don’t opt in!” in order to avoid the hefty fees that were once automatic—released a poll earlier this month that found that only 22 percent of bank customers chose to opt-in. An August survey by the American Bankers Association, however, put that figure higher—at 46 percent—but still lower than the figure quoted by the Wall Street Journal last week: a whopping 75 percent—meaning that three-quarters of bank customers supposedly chose overdraft fees over declined transactions.
What the surveys by Consumer Reports and Moebs Services—the bank-industry consulting firm whose survey was cited by the Journal—both agree on is that previous experience with overdrafts doesn’t seem to deter customers from opting in to overdraft coverage services that allow banks to keep collecting these fees, which often cost $35 or more for each transaction.
The Federal Reserve currently requires consumers to opt in to bank programs that charge fees for debit and ATM overdrafts, but it still allows banks to charge the fees by default when automated debit transactions and checks overdraw checking accounts. Last week, the Federal Deposit Insurance Corporation, which oversees state-charted banks, issued guidance to banks on how to curb abuses of overdraft protection programs and help customers who chronically overdraft to find better alternatives and avoid hefty fees.
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