Bank CEOs weigh prohibiting controversial overdraft practice
Chief executives of seven of the largest U.S. banks faced off with members of the House Financial Services Committee on Wednesday.
Topics ranged from lavish executive pay to banks’ policies on gun transactions. A few smaller but important issues were also brought to the table, like banks’ practice of reordering customer transactions to maximize overdraft fees.
Many banks argue that overdraft fees are the tradeoff for letting customers make purchases by debit card or check when there are insufficient funds in their accounts. Especially, because you can opt out and your card will simply be declined.
But as Reps. Carolyn Maloney (D-NY), Brad Sherman (D-CA), and Ayanna Pressley (D-MA) brought up, another part of the process seems much less justifiable: the reordering of transactions out of chronological order to maximize fees.
Charges are often categorized at the end of the day, so a charge made at 10:00 a.m. may come after the 4:00 p.m. one. Some banks choose to debit the larger charges first, even if they come later, because it means more overdraft revenue for them.
For example, if you’re $200 from the limit and buy a $5 sandwich and a $300 bicycle in that order, you might expect one overdraft fee. But the bank could decide to order the charges with the bicycle first, so both transactions trigger their own overdraft charge.
The issue is with “overdraft” fees is that it isn’t as simple as not swiping your card. When you’re poor, there are many ways to incur NSF fees. Also, the ways they’re implemented are often predatory. A $30 fee because you decide to post items out of order? That’s evil
— Diatonic Dissonance (@urbangaygriot) January 27, 2019
It all depends on the bank’s policies. In 2016, Pew found that about 40% of banks process transactions from largest to smallest dollar amount instead of doing so chronologically. (NerdWallet has a handy list.)
“Most of the largest U.S. banks with consumer checking accounts continue to charge at least $35 each time an overdraft is incurred,” the Pew study found, also noting that by and large the people who are hit with these fees are “financially vulnerable.”
A few key CEOs will consider support for prohibition
Rep. Pressley asked a few of the CEOs whether overdraft fees were a big part of their businesses. Citigroup CEO Michael Corbat said no, and Bank of America CEO Brian Moynihan estimated the amount of revenue as less than 1%.
Reps. Maloney and Sherman tried to get the CEOs to support or at least not oppose legislation that would prohibit reordering of charges.
“Please raise your hand if I can count on your lobbyists here in Washington — you all have them — to support a bill to prevent manipulating the order in which accounts are debited,” said Sherman.
Corbat and Moynihan raised their hands, tentatively. JPMorgan CEO Jamie Dimon raised his hand as well, and a few seconds later added, “I’d need to see the whole bill.” Goldman Sachs CEO David Solomon made a smaller, hand gesture as well that seemed more equivocal.
Sherman said he was referring to just the support for the measure. Dimon’s response was not audible after, but a JPMorgan spokesperson later told Yahoo Finance that the CEO had said he would have people look into it.
A Citibank spokesperson told Yahoo Finance that Citi is one of the banks that processes checks from lowest to highest, expressly to minimize overdrafts, and confirmed that Corbat had raised his hand in support of the legislation, which Maloney has introduced many times before.
Although BofA’s Moynihan raised his hand as well after being asked whether he would have his lobbyists support the measure, a Bank of America spokesperson said that “he agreed that we’d look into it,” a slight, but important change from Moynihan’s position in the hearing. The spokesperson added that Bank of America posts debit transactions and checks in chronological order and has done so for a “number of years.”
Goldman Sachs didn’t comment on Solomon’s gesture of potential support for legislation, but noted that it doesn’t have the same stake in the matter, as its Marcus brand of consumer products neither includes checking accounts nor non-interest fees.
Nothing major may come out of this hearing, in a divided Congress and no scandal or catastrophe to harness for political change. But it’s possible that the attention to these smaller but meaningful issues could impact consumers for whom it could be “the difference between a tailspin and getting by,” as Pressley put it.
Even if banks present like Citi and Bank of America do not engage in transaction reordering, support for a bill prohibiting the practice would still make a difference as many banks do engage in these practices. Bank lobbying has immense power in Washington, and any change would likely require its support or at least its indifference.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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