The top banks once uniformly processed large payments before small ones. Now they're processing high to low, low to high and everything in between.
In a move hailed by consumer advocates, Citigroup Inc. plans to process consumers' smallest checks first, resulting in fewer overdraft fees. The company will still process other payment types high-to-low, however.
Wells Fargo & Co. is preparing to drop high-to-low processing of debit, ATM, and other "must-pay" transactions in favor of chronologically ordering payments, though it will continue to process checks and ACH payments from high to low.
JPMorgan Chase & Co. switched to chronologically processing payments last year. Bank of America Corp., meanwhile, still charges high to low on some payments — but was the first major bank to wholly eliminate debit overdraft fees.
The splintering policies suggest the industry is still grappling with how to answer public and regulatory criticisms of overdraft fees.
Those concerns led to the requirement, beginning last year, that banks get consumers to opt in for overdraft coverage. In response to a query from American Banker, a Bank of America spokeswoman said the company wished to see common processing methods put in place industrywide.
"We have been advocating for a standard, legislated solution that would ensure a consistent posting order approach across the industry," she wrote.
Consumer advocates have long assailed high-to-low processing as manipulative and predatory.
"Processing the smallest transactions first should lessen the number of transactions that incur an overdraft fee," said Jean Anne Fox of the Consumer Federation of America. "That's real progress."
The move, first reported by the Associated Press, will almost certainly cost Citigroup revenue, though the company's modest retail presence in 13 states means the dollar impact will be smaller than it would have been for the bank's competitors.
In a memo to staff, CeCe Stewart, the head of Citi's North American retail bank, claimed nonfinancial motivations drove the decision. "We think this is the right thing to do and we believe we are the first major bank to do it," she wrote in the note, which outlined how Citi would limit a hypothetical customer's overdraft losses. Citi will start using its new processing methods in July.
On Tuesday, Wells Fargo told American Banker that it too is changing its methods. Among customer payments that the bank cannot refuse to cover — such as ATM withdrawals, debit payments and automatic bill payments — Wells will order payments chronologically, or from low to high when a transaction has no time stamp.
Wells' prior high-to-low practices were the subject of a California class action case that it lost last year. The company is appealing.
When handling checks or ACH payments for overdrafted accounts, however, Wells will still process them from high to low. Given that must-pay transactions will be paid regardless of overdraft issues, Wells spokeswoman Richelle Messick said, ordering bills from small to large will save customers money. But when it comes to payments that Wells might decline, she said, the bank believes it is in a customer's interest to have the largest bills paid first. "Processing customers' transactions high to low gives priority to larger transactions, which tend to be customers' high-priority payments," she said.
Because bounced checks on major items can result in numerous other fees and inconveniences, "paying these transactions into overdraft is often a lower cost option than returning these transactions unpaid," Messick said.
One way banks could help customers reduce overdraft fees would be by ordering transactions in an assorted fashion that would minimize overdrafts. When asked whether there were alternatives to choosing low to high or high to low for a category of transactions, Wells said such an option is not currently feasible.
Wells' new policy, which will take effect May 16, will resemble JPMorgan Chase's in that chronology will primarily determine payments. B of A, meanwhile, stopped permitting debit overdrafts at all last year, a decision it took after concluding that doing so would be better for consumers.
Given the sheer volume of debit payments, "what really set Citi and Bank of America apart are their debit practices," said Rebecca Borne of the Center for Responsible Lending. But she hailed Citi's new policy as providing both additional protection for consumers and a template for customer-friendly processing. "That's why I think Citi's move was really big: They came out and said, 'This is what's best for our customers.' "
