How Do Banks Maximize Overdraft Fees?
Some banks have adopted a variety of techniques for maximizing the fees they can charge for overdrawn transactions.
- Some banks hold customer transactions and then process them in a batch, processing the largest dollar amount first. Batch processing creates overdraft fees even for transactions that would not have created an overdraft at the time they were made.
- Oftentimes, “held back transactions” are not reflected in the customers’ available balance. This practice encourages customers to continue making transactions (creating even more overdraft fees).
- Another technique is to deduct the amount of a debit card purchase at the time it’s made—instead of waiting until the purchase clears—so the consumer can’t cover the purchase in the interim and the account moves into overdrawn status sooner. This means your bank is deducting the amount of your purchases from your account some time before they have to pay the merchant for the transaction.
How do these practices work to cost consumers more money? Imagine that you have $50 in your account. You make two debit card purchases for $20 each. Soon after, you make a debit card purchase for $100, and you go into the bank later the same day to deposit $100 to cover the purchase.
If the transactions were processed as they cleared the bank, your account would never be overdrawn and you would pay no fees. Even if the two $20 purchases cleared the bank very quickly, leaving you with only $10 in your account when you made the $100 purchase, you deposited money back into your account before the $100 purchase could clear the bank. But in this scenario, the bank would make no money, either.
If the bank uses the techniques listed above, the costs of your purchases will be deducted before they actually clear the bank, so your account will already be overdrawn before you can deposit the additional money. Also, the bank can batch the transactions and process the $100 purchase first, which means you would pay overdraft fees on each of your three transactions. When you deposit the additional $100, most—if not all—of it would go to paying the overdraft fees and your account would remain overdrawn.
The effect of these manipulative practices is to turn a debit card into a credit card by adding sometimes very steep fees to the consumer’s account. And it’s been a lucrative transformation. Banks make close to twice as much on overdraft fees than they do on typical credit card fees for late payments or over-limit purchases.
