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.