Ask Stacy: Is It Legal for Banks to Stack the Deck?

Photo (cc) by Akash k

It’s not legal for Vegas casinos to cheat by stacking the deck. But your bank won’t get busted for stacking the checks… or debit card transactions.

Here’s a recent viewer question…

I would like to know, is it legal for banks to change posting order of transactions for checking accounts? For example, you have four small transactions pending and a check is presented that is larger than the four already pending. The bank posts the larger check and pays the four smaller checks, but charges you $35 per check, instead of paying the larger and charging one insufficient check charge of $35.
Thank you,
RaeLa

I did my first news story concerning this practice more than 15 years ago. It’s an old banking trick: clearing transactions specifically to maximize overdraft fees.

Although RaeLa did a good job of explaining the scenario, just to make sure you’re hip to her drift, here’s an example:

You’ve got $1,000 in the bank. You perform five checking or debit card transactions on the same day…

Transaction 1: $5
Transaction 2: $30
Transaction 3: $20
Transaction 4: $10
Transaction 5: $1,000

The bank has several choices: They could pay the first four charges, then bounce the last one, since there’s not enough left in the account to pay it. They could pay the last one and bounce the first four. Or, they could do some combination.

If they charge $35 for overdrafts, in the first scenario they’d only make $35, because they’d only bounce the final transaction: the one for $1,000. The second option, on the other hand, earns $140 in fees, since they’d pay only the $1,000 transaction, then bounce the other four.

If you paid $140 in fees rather than $35, you’d argue the bank is taking unfair advantage of your bad luck. The bank, on the other hand, would likely counter they were doing you a favor by paying the biggest, and therefore presumably most important, charge.

Over the years, I’ve heard both of these arguments. Who’s right? In my opinion, the consumer is. Bank sequencing of checking account transactions to maximize fee income is simply kicking people when they’re down.

So much for the moral argument, but…

Is it legal?

Technically, yes. There’s no law against it. But maximizing fee income this way is frowned upon by banking regulators. Here’s an excerpt from a Federal Deposit Insurance Corporation (FDIC) Supervisory Guidance FAQ page:

Transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification.

Re-ordering transactions to clear the highest item first is not considered neutral because this approach will tend to increase the number of overdraft fees. By contrast, processing batches of transactions in a random order or order received is a neutral approach; however, institutions should not arrange the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.

If this is what happened to RaeLa, she should stroll into her bank, ask to speak to the manager, and politely point out that processing checks in order to maximize overdraft fees is in direct conflict with FDIC guidance.

She might also point out that Congress is currently considering legislation to curb abusive overdraft practices with a bill called the Overdraft Protection Act, which would curb this and other questionable overdraft practices, like charging a $35 overdraft fee when someone overdraws their account by purchasing a $1 cup of coffee.

Finally, she might mention that many class-action lawsuits have arisen over just this issue. For example, White v. Trustmark National Bank was filed on April 30, 2012, just five days after Citizens Bank paid more than $130 million to settle a similar suit. And that’s just the tip of the iceberg – there are tons of similar suits already settled or in the works. You can read many more at this page of the Center for Responsible Lending’s website.

RaeLa should explain to the bank manager in the nicest possible way that she hates lawsuits, especially when it involves her friendly local bank.

Is it preventable?

As I said at the outset of this post, I’ve been warning consumers about this banking practice for more than a decade, and I hope it’s clear I’m not sympathetic to the banks that employ it. However, now that we know it can happen, let’s take a little responsibility.

Keeping a balance in your bank account sufficient to cover the money you withdraw isn’t rocket science. It requires reconciling your account monthly and, if you live precariously, prearranging for a fee-free credit line or automatic transfer from savings to cover potential shortfalls. If you can’t find a cooperative bank, move your account to a credit union – they’re generally a better deal anyway.

In short, while it’s righteous to blame the mugger, accept some fault if you frequent dangerous neighborhoods.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
19 Things You Should Never Buy at a Grocery Store
19 Things You Should Never Buy at a Grocery Store

These household necessities are overpriced at the grocery store. Get them cheaper at these places instead.

Big-Ticket Things You Should Never Buy
Big-Ticket Things You Should Never Buy

In this week’s podcast: Are you wasting big money on these common purchases?

14 Products That Keep Foods Fresh Longer
14 Products That Keep Foods Fresh Longer

We’ve rounded up innovative Amazon purchases to lengthen the life of your favorite foods and beverages.

9 Forgotten Frugal Strategies — and How to Resurrect Them
9 Forgotten Frugal Strategies — and How to Resurrect Them

These time-tested methods can help us live smarter today.

7 Other Retailers With Free Prescription Delivery
7 Other Retailers With Free Prescription Delivery

Amazon’s new pharmacy is hardly the first to offer free shipping.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

12 Deep Discounts Available on Amazon This Friday
12 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.