Transaction Re-Ordering: How Banks Maximize Overdraft Fees

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Has your bank recently charged you an overdraft fee?  If so, don’t feel bad.  You’re not alone.

In fact, US banks collect about $30 billion a year in overdraft fees.  And the majority of that money is paid by low-income and young account holders.

Many banks use an accounting method called transaction re-ordering which maximizes the number of overdraft fees their customers incur.  It works by waiting until the end of each business day to process all payments made from your account.  This includes checks, ATM withdrawal, debit card payments, etc.  Your bank processes that largest payment first to increase the odds of an overdraft.  If an overdraft does occur, all smaller payments processed that day will also trigger an overdraft fee.

The following example is from Forbes.com:

Say you’re a student with $50 in your account.  You make 3 consecutive purchases for $10 each.  That leaves you with $20, but you still need to buy a $40 book for class that evening.  You decide to swipe your debit card anyway under the assumption you’ll be charged a $35 overdraft fee just once…In this case, the $40 book is deducted first leaving the student with $10 then the three $10 transactions are deducted.  That allows the bank to collect and overdraft fee two times instead of one.

The banks’ success in collecting these fees is based on the assumption that you’ll simply pay for the overdraft and not take the time or effort needed to contest them.

This is unfortunate because contesting an overdraft is easy and almost always successful.

If you have a dispute with your bank, feel free to contact me via email at justin@jrmccarthy.com.

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