Magazine article American Banker

WEEKLY ADVISER: Some Overdraft Policies Put the Bank's Interest before Common Sense

Magazine article American Banker

WEEKLY ADVISER: Some Overdraft Policies Put the Bank's Interest before Common Sense

Article excerpt

Let's take two customers, Mr. A and Ms. B.

Each one had an account at a large New Jersey bank and each had overdraft protection to cover checks written on insufficient funds.

Mr. A writes checks without enough money in the account to cover them, and his protection kicks in as planned. He is charged the bank's competitive rate of 15% a year for using this line of credit to cover overdrafts. No problem. Just a routine banking transaction.

Ms. B, however, has put money in her account to cover the checks she is now writing, but the deposit has not yet cleared. Thus, Ms. B has sufficient-but, by banking practice, unavailable-funds.

Now comes the amazing part.

Until the Newark, N.J., newspaper The Star-Ledger published a recent story on the practice, one bank said that its overdraft protection covered only "insufficient funds," not "unavailable funds." Since Ms. B's funds were simply "unavailable," no protection was provided. So Ms. B was hit with bounced check fees of $90 for three checks written to a total of $208.41.

The day after the Star-Ledger article appeared, that bank changed its policy. That same day, The Wall Street Journal ran a major story on banks' methods of clearing multiple checks that arrive on the same day. Both stories gave the industry a black eye.

The question raised in the Journal story, which has also been covered in this column, is that when several checks clear at the same time, should you process them at random, or do you clear the smallest first or the largest first?

The Journal reported that six of the nine largest banks in the country clear the largest check first. This means that if the largest check uses up the entire available balance, each subsequent check the same day is bounced, with a hefty fee attached. If the smallest were cleared first, the likelihood is that fewer bounced-check fees, or only one, would be charged. …

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