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Big banks resisting changes to overdraft fee policies

Instead of processing transactions chronologically, the banks do the biggest ones first, saying that ensures the most important payments are made. But that can be costly for low-balance accounts.

August 13, 2010|David Lazarus

Say this about big banks: They're persistent.

A federal judge this week ordered Wells Fargo & Co. to pay more than $200 million to customers for having processed debit card transactions in such a way that virtually guaranteed higher overdraft fees.

What does Wells have to say?

Julia Tunis Bernard, a bank spokeswoman, said the practice in question is "consistent with customers' interests" and that Wells will appeal the judge's decision.

Representatives of Bank of America Corp., Citibank and Chase told me they have no plans to change their ways either.

The issue here is how banks handle transactions involving people's checking accounts — in other words, payments with debit cards or checks, or ATM withdrawals.

Consumer advocates have long maintained that the only fair method is to process such transactions chronologically. That is, each payment or withdrawal should be handled in the order received.

This would give consumers a better chance of keeping track of their purchases, advocates say, and would hopefully give people a sense of when they might be approaching the end of available funds.

But many big banks do it another way. They process the biggest of each day's transactions first. Banks say this ensures that the most important payments jump to the head of the line.

What it actually ensures is that for people without a lot of money in their account, a single large transaction can push you into overdraft territory, and all other payments can then be slapped with an overdraft fee of up to $35 each.

"These neat tricks generated colossal sums per year in additional overdraft fees," U.S. District Judge William Alsup wrote in his class-action ruling.

He said Wells Fargo "went to considerable effort to hide these manipulations while constructing a facade of phony disclosure."

Wells raked in over $1.4 billion in overdraft fees from 2005 to 2007 in California alone, Alsup found. He ordered the bank to pay $203 million to customers for the "pernicious" fees.

Bernard, the Wells spokeswoman, called the decision disappointing.

"We believe Wells Fargo's method of processing transactions has been appropriate and consistent with customers' interests and the laws and rules of governing regulatory authorities," she said.

"While different customers may have a variety of different preferences, many banks process customers' transactions in high-to-low order because it gives priority to larger transactions — such as mortgage payments, rent or car payments — which are typically customers' high-priority payments."

Bernard gave no time frame for Wells' appeal.

A Bank of America spokeswoman said it also processes debit card, check and ATM transactions in high-to-low order. Representatives of Chase and Citi said debit cards and ATM withdrawals are processed chronologically, while checks are processed high-to-low.

"This tactic is just an opportunity to generate more profit," said Linda Sherry, spokeswoman for Consumer Action, a San Francisco watchdog group. "All the consumers we've ever talked to say this is just a way for banks to get more fees."

She said that even though consumer advocates pushed for federal authorities to end the practice of high-to-low processing, it wasn't addressed in a series of new rules imposed on banks' overdraft and credit card operations.

Time for lawmakers to revisit the question, I suspect.

Gift card fees

Speaking of debit cards, Los Angeles resident James Myers stopped by a Target store in Culver City recently to buy a $25 gift card. Easy, right?

Not so much, it turns out.

Inspecting his receipt, Myers discovered that he'd been charged $29 for the transaction. He was told that the price included a $4 "activation fee."

"I guess it's not enough that Target earns a profit when the card is used," Myers said. "Now they require an additional 16% profit."

Target isn't the only gift-card provider to charge an activation fee. American Express, for example, charges up to $6.95. Visa gift cards can come with activation fees of up to $5.95.

But you have to wonder: How much could it really cost to digitally record some value on the magnetic strip of a piece of plastic? A few taps on the keyboard, a swipe through the machine — that's a few bucks' worth of service?

And, as Myers correctly noted, the company offering the gift card already benefits in other ways.

So what does Target have to say about the practice? I wish I could tell you. No one at the company returned my repeated calls for comment.

But Myers had a decisive response to the issue. He canceled his purchase and took his business elsewhere.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com

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