Let's take two customers, Mr. A and Ms. B.
Each one had an account at a large New Jersey bank and each had overdraft protection to cover checks written on insufficient funds.
Mr. A writes checks without enough money in the account to cover them, and his protection kicks in as planned. He is charged the bank's competitive rate of 15% a year for using this line of credit to cover overdrafts. No problem. Just a routine banking transaction.
Ms. B, however, has put money in her account to cover the checks she is now writing, but the deposit has not yet cleared. Thus, Ms. B has sufficient-but, by banking practice, unavailable-funds.
Now comes the amazing part.
Until the Newark, N.J., newspaper The Star-Ledger published a recent story on the practice, one bank said that its overdraft protection covered only "insufficient funds," not "unavailable funds." Since Ms. B's funds were simply "unavailable," no protection was provided. So Ms. B was hit with bounced check fees of $90 for three checks written to a total of $208.41.
The day after the Star-Ledger article appeared, that bank changed its policy. That same day, The Wall Street Journal ran a major story on banks' methods of clearing multiple checks that arrive on the same day. Both stories gave the industry a black eye.
The question raised in the Journal story, which has also been covered in this column, is that when several checks clear at the same time, should you process them at random, or do you clear the smallest first or the largest first?
The Journal reported that six of the nine largest banks in the country clear the largest check first. This means that if the largest check uses up the entire available balance, each subsequent check the same day is bounced, with a hefty fee attached. If the smallest were cleared first, the likelihood is that fewer bounced-check fees, or only one, would be charged.
Some readers might say: "What does Nadler know? He never had to worry about bank earnings and legitimate ways of boosting them." Indeed, one of the first suggestions some bank profitability consultants will make is that the bank clear the largest check first as a way to enhance earnings.
When asked how to prioritize checks for clearance, most banks will respond in one of two ways.
Some feel that the largest check is usually the most important-say for rent-and that it is in the customer's best interest to handle that one first.
A different response is from a bank consultant who felt that people who overdraw their accounts know what they are doing is "bad," and in some way want to be "punished."
But as for the policy of favoring those who write checks on insufficient funds over those who have uncollected funds, I find little justification.
Maybe if the bank sent a survey and offered customers a choice of an overdraft fee or the collection of interest, this might help abate the bad publicity.
But looking at the practice described in the Star-Ledger article and the immediate end of it once it was publicized, all I can conclude is that the bank had felt it was a good way to augment income with few repercussions.
Bankers often get wrapped up in their own goals. Yet if they were to step back and look at some practices from the point of view of outsiders, they might be amazed at how different their ideas are from those of the customers on whose good will and loyalty they must depend. Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management.