Union Bank Email Show Overdraft's Seedy Underbelly

"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.

"Posting large items first has been done before and is very painful to customers," wrote Charlie Pedersen, who oversaw the bank's processing operations, shortly after the high-to-low processing policy was proposed. "So go forward into the night, but keep the headlights on."

Pedersen, who has since retired, did not return a call from American Banker.

"We should … burn all our documentation that [says the only purpose of reordering payment] posting sequence = more fees," an employee wrote in an exchange cited by class action attorneys.

Union Bank's venture into high-to-low processing began in 2002, when it retained CAST, a consulting firm headed by Steve McCollum, a former Citigroup banker. CAST promotes itself on its website as an expert in "revenue optimization" based on a "database of proven revenue enhancement practices." Its clients include Citibank, Wells Fargo, U.S. Bank and more than a dozen large regional banks.

Union Bank brought in CAST with a mandate to leave "no stone unturned, particularly in the fee-income area," according to a document cited in an amended complaint but not yet available through Federal court records.

CAST turned to overdraft processing. The tweak required is conceptually simple: By deducting a customer's largest payments first, the bank increases the likelihood that his or her account will incur multiple overdrafts.

The order in which the transactions are processed can have a big influence on fees charged. Assume, for example, that a customer has $100 in his checking account and engages in four debit card transactions over the course of a day — three for $10 and a final one for $110. Processing the small transactions first will result in a single overdraft charge, while putting through the large transaction first will result in four overdraft fees.

A system of putting through the transactions in whatever order maximized fees would in the first year boost Union Bank's overdraft revenue by $18 million, or nearly 25%, CAST estimated. CAST also recommended raising the charge per overdraft and sought one-fifth of all additional revenue.