Academic journal article ABA Banking Journal

Time to Ditch This Questionable Practice

Academic journal article ABA Banking Journal

Time to Ditch This Questionable Practice

Article excerpt

IT WOULD BE A LITTLE MORE convincing if it were clearly spelled out to the customer. We're talking about the practice of arranging checks and other transactions in order of high value to low when multiple items arrive for payment on the same day. The rationale is that the largest items are likely to be most important to the check writer-a mortgage payment, for example-so that if it turns out insufficient funds are available, then at least the most important item is paid. Some customers might welcome this. But we don't get the sense that they are being told about it, nor told that, as a consequence of paying highest items first, more items are likely to be "bounced" when there are insufficient funds-resulting in more, and substantial, fees.

Customers, of course, are not supposed to initiate payments against an account that has insufficient funds to cover it, unless they have a credit overline. When they do, it's fair to charge a fee.

Somewhere along the line, however, and well before bounce protection programs arrived, rubber checks became a line of business for many banks. As a result of higher fees and the adoption of various practices to maximize those fees, NSF items gradually became a major component of noninterest income.

A few years ago we recall hearing a banker defend the practice of arranging checks high to low for payment, even while acknowledging that it was done to increase fee income. It was defended both as a "favor to the customer," as described above, and on the grounds that people shouldn't write checks against insufficient funds to begin with. It was an extension of the reasoning that high bounced-check fees are intended to be punitive. Seems to us this is arguing the case both ways. …

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