Banks have long argued that processing debit card transactions by starting with the largest dollar balances and working their way to the smallest benefited customers. Here's an alternate explanation of what might have motivated them: "Multiple Millions $$$$$$$$$$$$$$$$$$$$."
That was the pitch a popular vendor of "high-to-low" debit transaction processing software delivered to Union Bank of California, a unit of Mitsubishi UFJ Financial Group, according to documents recently unsealed in a consolidated federal class action.
CAST Management Consultants promised that by processing customers' daily checking and debit transactions based on the highest to the lowest dollar values, instead of in chronological order, Union Bank could drastically increase how many "insufficient funds" fees clients paid. Union Bank signed up, according to an amended class action complaint pending in U.S. District Court for the Southern District of Florida.
The Union Bank case is one of more than 30 related suits pending before U.S. District Judge Lawrence King and the first in which previously confidential documents have been unsealed. Consolidated by the court in 2009, the now unified multidistrict class action alleges that large banks manipulated the order in which they processed debit card transactions to checking accounts to stick customers with higher overdraft fees. Specifically, it alleges that banks shifted to high-to-low processing to maximize the number of overdraft fees charged after customers' checking account balances dipped below zero. Such practices were often hidden from bank customers even as they were used to extract illegal fees, the class action alleges.
The industry has contended that high-to-low processing was legitimate and in fact in demand among customers who wanted their largest bills to be paid first.
The difference of views has led to numerous cases charging leading banks with wrongful behavior. Among them: Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Fifth Third Bank. Some of the suits have been settled out-of-court. In other cases banks appear to have a solid shot at getting claims transferred to industry arbitration panels, where they are likely to result in a more favorable outcome for defendants, as previously reported in American Banker.
In Hassler v. Sovereign Bank, a judge in the U.S. District Court of New Jersey dismissed a high-to-low case because the judge found that the bank's processing method had been adequately disclosed.
Whatever the final outcome of the Union Bank case, it could prove highly embarrassing to the commercial banks by showing how they aggressively adopted recommendations of lavishly paid consultants, even as they downplayed the ethical, legal and reputational risks.
"They're all similar," says Aaron Podhurst, an attorney on the plaintiffs' executive committee in the consolidated Florida class action, of the lawsuits. Banks "were warned in-house that this is dangerous, get rid of this, not a good idea. And they didn't heed that."
Documents filed in the Union Bank case appear to paint a picture of an institution focused on maximizing fee revenue by using CAST's technology while dismissing employee concerns that resequencing payments was unfair and possibly illegal. One bank employee argued high-to-low processing was harmful to "Poor but Honest" customers, according to an email sent from a colleague and cited in the amended complaint.
Bank documents turned over to plaintiff attorneys during discovery indicate Union Bank agreed that CAST would receive 20% of any extra overdraft charges generated under its high-to-low system. Union Bank employees also discussed how to hide the bank's policy from customers, even as it was costing them tens of millions of dollars, internal emails show.
"By design, the details of what happens inside the bank when an overdraft occurs were never intended to be communicated to the public," a Union Bank employee wrote to a colleague in an email cited in the suit.
Union Bank said its overdraft policies were in line with those of its peers in a written statement to American Banker. Those policies "reflect our customers' preferences, and are lawful," a bank spokeswoman wrote. CAST, which is based in Los Angeles, did not respond to repeated requests for comment.
There is a strong case to be made for processing checks — as opposed to debit card transactions — in descending order from those with the largest to the smallest balances, says industry researcher Mike Moebs. Large payments tend to be the most important to customers, and beginning with them makes it more likely that they will be paid in the event that a customer does not have enough money to immediately cover all charges.
In contrast to check processing, however, debit card charges are what are called "must pay" transactions, meaning the bank is committed to covering all bills in the system. Under these terms, there is no benefit to customers in having their largest transactions processed first.
Union Bank reversed its high-to-low overdraft policy last year. It now posts transactions from the lowest-to-highest values.
Some Union Bank records do show employees arguing that high-to-low processing would meet an unspecified "customer demand." However, executives raised objections on fairness grounds, while the employees implementing the system appear to have feared an adverse customer reaction.