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Read: Documents Reveal One Bank’s Plan to Squeeze Customers for More Overdrafts

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A Wells Fargo bank branch in Berkeley, Calif. (Justin Sullivan/Getty Images)

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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Quite informative, thanks

Given that 75% of banks automatically cover debit and ATM overdrafts, it’s obvious that this is nothing more than a lucrative form of credit for them.  The excessive fees should be reined in.  At the same time, consumers need to take more responsibility for their finances.  If you don’t know how much is in your account, you probably shouldn’t be spending.  Banks, or any other industry for that matter, prey on ill informed individuals.  Switch to cash…when you’re pockets empty you’ll know.

It should also be noted that banks charge NSF fees in certain circumstances when they deny a payment.  So, when you opt-out of “overdraft protection,” you are essentially choosing to have the payment denied and pay an NSF fee instead of having the payment covered and paying an Overdraft fee.  If I remember correctly, the only exception is if you use your debit card with your PIN there will be no NSF fee.  Checks, debit card signature transactions, pre-authorized automatic payments, etc. can all give rise to an NSF fee.  This law was a step in the right direction, but I don’t think that banks should still be allowed to charge $35 NSF fees too.

Also, the option to link your checking account to a credit card, savings account, etc., is great.  Why doesn’t everyone do that?  Oh yeah, because not everyone has a savings account with money in it, or a credit card with available funds.  And who are those people?  Oh yeah, that’s right, the poor.

I think we should all shred the plastic, get along with cash.No more fees to banks. $35.00 fee amounts to tht much food on the table r a tank of gas. For those that have no cash, figure out a wy to get it and stop feeding this frenzy.

Duh? 

“it still allows banks to charge the fees by default when automated debit transactions and checks overdraw checking accounts.”

Well, I’m no math whiz, I’ve always known that, but in common sense/logic I think I do okay.  With that in mind, can anybody tell me what is the point of the overdraft by default “out”? 

Isn’t this just semantics or am I missing something?

I confess, I have been one of the SELFISH, THOUGHTLESS AND NEGLIGENT people who have gotten 3 or 4 overdrafts in one day WHICH WOULDN’T HAPPEN if I didn’t SPEND SPEND SPEND w/o balancing my checkbook.

That is what my critics would (and do say) though on some of these complaint sites.

I disagree with them.  There are reasons which I won’t go into (reasons for not knowing it was going to overdraft me).  I am one of the fortunate ones in that I have a regular income but I am unfortunate in that it is fixed and is what it is.  And it doesn’t go far enough.  Sometimes catastrophe’s and unforseens pile up all at once and since I have no credit cards, I live month to month.  Any overdraft then sets me up for a FAILING GRADE again next month as I start out in the hole.  Since Im the only one who pays my bills, why would I choose to shoot myself in the foot by overdrafting, especially when its for something like a $2 hamburger?

When the bank reorders checks the $2 hamburger that would have gone through (BUT FOR GREED) ends up costing me $37 and puts me behind the 8-ball from there on as far as budget is concerned.  I never had a bank refuse any of my overdrafts so telling me that they took my biggest charge first out of concern for my “important stuff” doesn’t hold water.  They let every charge go through so there is no point in reordering other than that same sinful trait behind so much misery today GREED.

Joe Carey: Very astute observations, thank you for looking past the tip of your nose and seeing that the easy solutions aren’t all that easy or even possible.

I remember once I got 5 overdrafts in one day, I was just sick about it because I knew I’d not be able to pay all my bills coming up with over $150 unplanned for debit that I would have nothing to show for except for laying awake at night trying to figure a way out of this.  Anyway, I lowered myself to beg, plead, whine with the bank, I went to my branch and did exactly that.  I can remember the look of disgust on the nice representatives face as she coldly informed me I had already received my “grace” adjustment on OD’s before.  I actually humiliated myself trying to “fix” this.  Eventually they agreed to credit half of them.  “Oh, thanks for only robbing me of half as much money”.  But I was told NO MORE ADJUSTMENTS you’re on your own.  They said what you mentioned “linking” accounts.  I have no other account.  The credit card they urged me to apply for I was turned down on.  But anyway, even if I had another account to link to that isn’t free either.  Oh no, the clever banks charge something like $4 or $5 as a “transfer” fee or whatever they called it.

NO ONE ever told me I could opt out and choose to have charges denied.

And I guess really I still can’t opt out as it looks like charges will go through anyway.

This is profiteering by those who have against those who haven’t.  Someone read me the riot act and told me how selfish and stupid I was expecting to get to borrow “her money (in the bank)” for free, who’d I think I was anyway?  I told her it’s people like me who are paying for rich folks like you getting free checking.

She didn’t buy it obviously, I mean I’m a low-life dummy right?

Paul: “Cash” is a problem or could be.  For one thing, crime rates are going up, my house was broken into this past summer and 2 computers stolen, if I’d had cash or if I got my purse stolen/snatched I’d be out again.  I’m afraid to carry much cash.  Sometimes charges come in you weren’t aware of.  And sometimes YOU HAVE TO.  Like what if you get a flat tire that if you don’t fix you won’t get to work and you’ll get fired or docked big time.  Want to gamble that the payment doesn’t hit the bank ahead of a deposit.

Not only that, but the fact that they reorder the debts erases all doubt from my mind that this isn’t just some way for a bunch of greedy rich guys to get more of what precious little I have.  Cause like I said, no one has ever turned down the last debit so since they all went through there was no benefit to me to put the biggest through first.

There have been times when if I’d know it would have been overdraft I would have either forgone or gotten enough cash together for a small purchase of a drink or sandwich but I didn’t and so I take a huge hit.

It’s like the payday loan thing (which thankfully I have not had to resort to yet) once they get their hooks in you, DONE FOR.  Because now you start out in the hole next month.  It never ends, at least not until you die anyway.

Note that Bank of America is charging a $6.00 fee for non-customers to cash a check drawn on their bank; a customer next to me had a check of some $25.00 + they insisted on that fee plus I D + a thumb print on the check

Thanks for the education—coming from one who has been ripped off by overdraft fees. I recall going to the bank and asking for help in avoiding overdraft fees; I couldn’t understand why I was having more than usual. I’d pore over my statements from SunTrust, wondering why all my transactions seemed to post the day before my direct deposit. $39 for a $1 redbox rental or a candy bar.  My overdraft fees were often double or triple the size of what had been overdrafted.

I was laughed at, not helped. I complained about not being declined and was told that I was unusual to complain, that most wanted the ability to overdraft. I complained about the lack of real time reporting on the internet banking site and they implied that I was again unusual in my complaint. They’d run me to others—you have to call the internet people, or you have to go the branch where you originally opened the account. No wonder they offered free checking.

I was ripped off and the bank was allowed to rip me off. How am I supposed to question their accounting system? How am I to know when a payment was presented? These days you have to read every single piece of paper, word by word, line by line, to catch someone. And they know most people are inundated with paper and therefore won’t catch them. This bank stole from me.

I went to a credit union, have been with them a year and strange thing—I haven’t had an overdraft. Of course, closing an account is likely to trigger more fees. If someone presents to your old account, it magically reopens it and you get a fee. If you don’t catch a mistake in a few weeks, the bank gets to keep their stolen goods.

I’m very bitter about this and I wouldn’t have bailed any of these banks out. Why does our govt go out of its way for these crooks, but not for the people?

I used to be an irresponsible spender, and I paid a lot of these fees to Wachovia/WellsFargo. Recenlty, while cleaning up my act, I applied for a line of credit and was declined.

For years, the bank had covered my bad purchases and was always reimbursed by my direct-deposit paycheck (twice a month, from the same employer the entire time). If the bank doesn’t expect to be reimbursed for the overdraft coverage AND to receive the fee, these practises wouldn’t be profitable. So even though they knew I could cover a small line of credit, they turned me down. Could that be because their interest rate on a line of credit would be limited by usury laws and therefore less profitable?

On one occasion, a cash deposit I made did not post until the following day, triggering an OD fee. The OD fee itself triggered a 2nd OD fee. Now that I know about this “Sort Order Optimization” policy, that makes a lot of sense. I was able to get both these OD fees removed by talking to someone. But I did have to make my case very carefully and then make the case all over for the 2nd fee.

Again, the first responsibility is on me to be more responsible with my money. If you have the same problem I do, be warned: these people WILL take advantage of you.

OneSovereignCitizen

Dec. 2, 2010, 10:33 p.m.

Take the time and obtain a REAL education about Economics by visiting this link—

http://csper.org/renaissance-20.html

The pyramid will astound you!

If Wells Fargo was told that they used false pretenses in order to gain fees by reordering the processing of checks and could no longer do this, why do other banks continue to do this even today? And, they use the same argument - “we believe the larger checks are more important” - meaning all the smaller checks will generate overdraft fees instead of just the one large check going over. I had heard this before, yet it hasn’t stopped the banks from using this very sneaky way of maximizing fees!

We did a Dave Ramsey financial course a couple of years ago to do better.  This last summer we received an overdraft notice (and we only use local banks), but the monthly statement did not show an overdraft during the month.  The evidence was taken to the bank and of course the person couldn’t explain it other than it was the way the checks were posted, but as we had no overdraft for over a year the fee was refunded.  This article will be sent to that bank.

Not all who get charged for overdrafts are irresponsible.

And the simple fact is (as demonstrated in my case wherein the banks NEVER denied a charge resulting in overdraft) there is no reason to juggle the order the debits are submitted in on the basis of “importance” because if they pay them all and not turning any down then there is no “importance” or priority to the checks.  THE PRIORITY IS TO GET AS MUCH MONEY AS POSSIBLE NO MATTER HOW MORALLY BANKRUPT THEY ARE WHO DO IT.

If I have not already said so, when this all started with Commerce Bank to begin with, AT NO TIME was I ever given the option of OPTING OUT.  I was given two choices to avoid some of the charges.  Either set up a savings account (and the only savings I had at the time were in IRA’s that would entail a possible penalty) or get one of their charge cards.  I could not qualify for a charge card.  I was desperate to stop these charges because I am not stupid nor do I want to be homeless because I can’t pay my bills nor do I want to spend the winter with no heat because I can’t pay utilities.  I was VERY MOTIVATED for the charges to stop.  When my desperation had to be VERY OBVIOUS and I was in obvious distress, all the employees around this small branch office who were aware what was going on basically took the attitude of it was open season to lay into me for being derelict and blame me.

If they thought I was irresponsible then they should have quit covering my charges or to have told me I did NOT HAVE TO HAVE overdraft protection.  Instead they all ganged up to have a good old character bashing WHICH I COULD HAVE DONE WITHOUT.

btw, Commerce and I are happily no longer affiliated.

Nissim Sasson

Dec. 6, 2010, 9:57 p.m.

I say it before and i ll say it again every body should get their money out of these big Banker institutions and put it in Credit Unions on your community then the will start begin customers to come back and then maybe we will finally be treated like customers and not like somebody that they can take your home, your money or the Tax payer money ! !

Bosco LaMonte

Dec. 7, 2010, 11:44 a.m.

Nissim…

GREAT SUGGESTION, and once you move your funds to a Credit Union forget about ever going back to the BANKSTERS.  That’s a lesson with attitude.  Do it today, I did.

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Dec. 13, 2010, 10:26 p.m.

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