In 2017 the banking industry made over $35 billion from its customers in fees alone. Much of this revenue came from bank overdraft fees.
Standard bank overdraft fees at most financial institutions are around $35, and nearly 80 percent of banks approve ATM and debit transactions that will cause an account to be overdrawn, rather than decline the transaction. This results in hefty bank overdraft fees for the customer, and increased revenue for the bank.
To fight back, consumers’ rights advocates have filed class action lawsuits against banks that manipulate the way bank transactions are processed in order to maximize fee income.
How Do Bank Overdraft Fees Work?
Bank overdraft fees occur when a customer attempts to conduct a transaction from their bank account that they do not have the financial means to cover.
For example, suppose you have $1,000 in your bank, and make the following transactions in one day:
- Morning:Coffee ($3)
- Afternoon: Lunch ($12)
- Evening: Rental payment ($1,000)
If your bank applied the transactions in the order in which you made them, you would have only been assessed a $35 bank overdraft fee. Instead, the bank may apply the $1,000 rental payment to your account first, thereby creating an “insufficient funds” or “overdraft” status on your account. Your bank then charges you $35 or more for each of the other transactions, resulting in a total fee of $105.
Bank overdraft fees became popular because of increased competition due to deregulation, and technological advances that allowed banks to charge customers money by adding fees to almost everything. This combination has resulted in healthy profit margins for banks. In fact, research by the Pew Charitable Trust shows that bank overdraft fee income more than doubled between 1984 and 2015.
According to Pew, American banks reported more than $11 billion in overdraft and insufficient fund fees, which represents nearly ⅔ of all consumer deposit account fee revenue.
To maximize the number of bank overdraft fees they can charge, some banks will process transactions in ways that leads the customer’s account to be drained more quickly. It is this situation that consumers’ rights lawyers say is unfair because the fees are not applied fairly.
Bank Customers Wrongly Assume a Transaction Will Be Declined In Cases of Insufficient Funds
A bank cannot charge overdraft fees on debit purchases or ATM withdrawals unless the consumer specifically agrees. However, many customers say they never asked their banks to provide overdraft protection and assumed that if they tried to buy something they could not afford the purchase would be declined. Instead, consumers say these purchases are being approved and that customers are being hit with large overdraft fees.
Authorization Holds Push Accounts into Overdraft
Banks also use a practice known as an authorization hold to push customers into overdraft.
An authorization hold occurs when a customer uses a debit card for a transaction. The bank places a hold on the amount of the transaction when the purchase is made, but does not actually withdraw the funds. It is only when the merchant settles the account, sometimes several days later, that the funds are transferred to the merchant and withdrawn from the customer’s account.
For example, suppose a customer has $100 in a bank account and makes a purchase of $40. An authorization hold is placed on that $40, but the funds are not actually taken out of the account. The customer cannot access this money, but it is still in the account. It is only when the merchant submits the batch of transactions that the money is removed from the customer’s account and transferred to the merchant.
This is all completely legitimate; however, many customers complain that banks back-date transactions to the date they occurred, rather than the date they were settled, to push the account into overdraft. The customer may not have had the funds necessary on the date the transaction occurred, but did have the funds necessary by the day the transaction was settled. Or, the customer may have had the funds available on the date of the transaction, but did not have the funds available on the date the account was settled. This manipulation of processing dates by the bank can result in bank overdraft fees.
Irregular Posting Schedules Cause Customer Accounts to be Overdrawn
Customers also complain that banks create overdrafts by posting debits and deposits to accounts irregularly.
Banks are required by law to make deposits available to a customer within a certain number of days. However, the bank can choose to make the deposits available sooner. When check posting occurs inconsistently, customers cannot predict when a deposit will be posted to their account. Sometimes, they say, the check is posted immediately while other times the check is not posted until after the account goes into overdraft. This inconsistency benefits the bank, and allows the financial institution to charge bank overdraft fees.
Customers Earning Less Than $50,000 Per Year Account for the Highest Percentage of Bank Overdraft Fees
Eighteen percent of account holders pay 91% of the service and bank overdraft fees. A majority of these customers earn less than $50,000 per year. To put these figures another way, 25% of bank customers pay a week’s worth of income in overdraft fees every year.
The Pew Charitable Trust research found that “debit card transactions are the preferred tool of the most financially vulnerable bank customers. Because overdraft fees are flat and fixed – they are the same whether an account is overdrawn by $10 or $100 – debit card overdrafts bear the most disproportionate penalty because they tend to be the smallest transactions.”
Consumer Rights Advocates Fight Back Using Class Action Lawsuits
Consumers’ rights advocates are fighting back by filing class action lawsuits against banks that manipulate transaction processing to maximize bank overdraft fees.
A class action lawsuit is brought in state or federal or state court by one person or a small number of people as representatives of a larger group. The larger group is called the “class.” The representatives are named as the plaintiffs in the case, and they represent everyone in the class. The lawsuit seeks compensation (damages) for members of the class for a wrong that they all suffered.
Class actions are used to combine claims that are often individually too small in amount to justify a separate action. Combining the claims into a class can justify the expense of litigation and improve the chances of success, especially when a big corporation is being sued.
Class action lawsuits are often used to litigate claims for violations of consumer protection laws, such as banks for charging their customers excessive fees.
If you believe you have been wrongly charged overdraft fees, contact a class action consumers’ rights attorney at Robenalt Law today. Call 216-223-7535, complete our online form, or email [email protected].
Tom Robenalt started his litigation career defending financial institutions in class action lawsuits at a large firm in Cleveland. For the past 20 years, he has used that experience to help Ohio consumers obtain the damages to which they are entitled.