Veronica Gutierrez never asked Wells Fargo to act like her mother. The banking colossus just did it anyway. Here's what happened. She bought some sandwiches at Subway for $11.27. Then she purchased car parts at Autozone and went grocery shopping. Twelve transactions into the billing cycle, she wrote a check for $65. It overdrew her account, which should have cost her an overdraft fee of $22.
But Wells Fargo didn't order Veronica's purchases chronologically. Rather, it took the liberty of reordering her purchases so the biggest ones came first. Instead of the Subway meal for $11.27, the bank's reordering placed an $80 transaction at the top of the list.
The result: she ran out of money faster. Wells Fargo drained Veronica's account nearly dry after just eight transactions. Every purchase after that just put her deeper in the hole.
This fancy footwork allowed Wells Fargo to quadruple its revenue from overdraft fees, from $22 to $88, according to an analysis by the Pew Charitable Trusts.
Does that seem underhanded and sneaky? It sure did to Veronica, who filed a class-action lawsuit against Wells Fargo over the practice. The suit won $203 million in restitution for victims. In his decision, Judge William Alsup cited an internal Wells Fargo memo that predicted the bank would earn an extra $40 million a year in overdraft fees.
In reality, transaction reordering earned Wells Fargo "hundreds of millions of dollars" -- just from its customers in California -- between 2004 and 2008, according to the decision. "(G)ouging and profiteering were Wells Fargo's true motivation" for changing the order of transactions from high to low, Judge Alsup found. "High-to-low posting was adopted exclusively to generate more overdraft fees and fee revenue at the expense of depositors." Alsup's decision was partly overturned on appeal in December, however, and the outcome remains uncertain.
Banks say this is not simply a new way to squeeze profits from unsuspecting customers. They claim that by processing the largest transactions first, they're actually doing us a solid. They're looking out for us, as a parent might look after a wayward child. (Thanks, Mom!)
"A high-to-low posting order has the advantage of ensuring that the most important payments (e.g., mortgage payments) ... are paid first," the Financial Services Roundtable, a banking industry trade group, said in a comment letter to the federal government last year.
The "Crystal Ball" Method of Budgeting
Suspend your disbelief for a moment, and consider this argument at face value. Assuming our newfound financial services fiduciaries aren't reshuffling transactions to generate $23.7 billion in overdraft fees from us every year, but rather to help us protect our most important assets: our homes, cars and credit.
When I balance my checkbook, I don't order payments from biggest to smallest, and I doubt I know anyone who does. We don't have functional crystal balls, and we can't always see every expense in advance. The entire reason folks balance their checkbooks and track their expenses in the first place is to make sure they have enough money in the bank for the purchase that comes next.
We track our expenses chronologically. But some banks have decided that's the wrong way to do it. Rather than trust our judgments as adults to manage our finances and be responsible about balancing our incomes versus our expenses, some banks choose to treat us like children. Since our mortgage and car payments are some of the largest and most important payments we make, banks argue that they are merely assuring those big payments get made first.
In the best case that is called infantilizing... Worst case: gouging. When I write my mortgage check every month, I know for darn sure there's enough money in my checking account to cover it. The same goes for my car payment. To do otherwise would be self-destructive.
Conversely, I can understand going over the limit on smaller charges. If I buy a pack of gum or a tank of gas when I know I'm close to my limit, but I think I can just squeak by, that's a guess that we adults make. Often we're right, sometimes we're wrong. Few adults blow their paychecks on Furbys and remote-controlled helicopters. Either way, that's our decision to make. (And for those who roll the dice and get snake eyes, they will suffer the consequences, including an average overdraft fee of $30 to $35.)
But banks don't get to rule by the laws of "because I said so." That's a parent trap. Yet in the name of protecting us from ourselves, financial services institutions do exactly that. As of last summer, Bank of America, JPMorgan Chase, Wells Fargo and Capital One, among others, all processed at least some transactions from biggest to smallest.
Time for a Time-Out
Since our self-appointed financial guardians will not stop of their own accord, federal legislation is the only answer here. Provided it doesn't get buried by the banking lobby, help is on the way. Rep. Carolyn Maloney, D-N.Y., plans to reintroduce legislation she first proposed last year to reform bank overdraft practices. Among other things, the bill would prohibit institutions from manipulating the order of transactions to maximize overdraft fees.
"While some banks have instituted more consumer-friendly overdraft policies -- and they should be applauded -- consumers need and deserve the uniform protections a federal statute can bring," Congresswoman Maloney said in an email. "That's why I'm planning to reintroduce my Overdraft Protection Act shortly."
Consumers like Veronica Gutierrez don't need banks to quadruple the amount of punitive fees they must pay, especially not under the motherly (or fatherly) assumption that banks know what's best for you.
Rep. Maloney's bill is a logical response, and I hope it becomes law during this session of Congress. It's time to put a stop to the billions of dollars that banks are draining from consumers by way of sneaky overdraft fees.
Anyway, last time I checked, our mothers do what they do to protect us, not profit from us -- that's what evil stepmothers do.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.