Under pressure from regulators and lawyers, nearly all banks have stopped the predatory practice of reordering debit-card purchases to gouge customers for overdraft fees. But there is no law that prevents banks from starting up again, according to one consumer advocate that's been studying this method.
Earlier this month, Bank of America was ordered to pay $410 million in compensation to consumers for engaging, for 10 years, in transaction reordering -- essentially processing higher-dollar purchases first, causing a cardholder to run through account funds faster and get hit with more overdraft fees.
Pew Charitable Trusts released an interactive graphic (below) this week that illustrates precisely how the reordering works. In the graphic, drawn from the case of Gutierrez vs. Wells Fargo, a consumer was charged $88 in fees because the bank processed the highest dollar value transactions first. If the charges had been processed in chronological order, the overdraft fee would have amounted to only $22.
The Bank of America suit is just one of several pending against banks, including related litigation against Wells Fargo and Citibank. The Federal Deposit Insurance Corporation issued guidance in November 2010 asking banks to "not process transactions in a manner designed to maximize the cost to consumers."
Banks have defended the practice by saying it's a way of clearing the biggest payments first for consumers. And despite the cries of consumer advocates, like Pew, and the numerous lawsuits, some banks were still engaging in the practice in early November when the Bank of America settlement was announced.
Further, there's no law in place to prevent banks from starting the practice again. "They may phase it out today but bring it back tomorrow," said Susan Weinstock, director of the Safe Checking in the Electronic Age project at Pew Charitable Trusts.
Pew is calling for new regulatory measures by the Consumer Financial Protection Agency to explicitly prohibit the practice of reordering debit-card transactions, as well as other ways banks conduct activity -- such as using long, complicated disclosure statements -- in order to maximize their own profits.
Even as banks have backed off high-to-low ordering of transactions, consumers are still on track to pay more than $16 billion in overdraft fees this year.