Fifth Third Bank and Banking & Finance and Government

More banks processing transactions by date

October 15, 2011

The settlement of a class-action lawsuit involving Fifth Third Bank could change the way some financial institutions process customers’ monthly transactions.

Fifth Third agreed in August to establish a $9.5 million fund to pay customers who said the Cincinnati-based bank improperly charged them overdraft fees by “re-sequencing” debit-card and ATM transactions.

The federal suit in a Northern District of Illinois court claimed Fifth Third recorded larger transactions first, despite the order in which they were made, to maximize the number of overdraft fees it could charge.

In essence, the class of plaintiffs argued the bank, by processing a mortgage payment first, for instance, charged customers numerous overdraft fees on smaller, subsequent transactions when they didn’t have the funds in their checking accounts to cover them.

Fifth Third, which has 48 branches in the Indianapolis area, denies the claims and said both sides agreed to settle the case to avoid the costs of a risky trial.

The bank early this year switched to a system of processing transactions in chronological order rather than by amount, Fifth Third spokeswoman Natalie Guzman said.

“Our commitment to our customers is to provide the best services for our customers,” Guzman said. “Hopefully, this change will assist with that.”

More banks are expected to follow Fifth Third’s lead, though the dilemma of how to process transactions has vexed banks for years.

They mostly process them one of four ways: by smallest to largest amounts or vice versa, by order in which they were received, or by check number.

“Banks have kind of been all over the board on this,” said Joe DeHaven, president and CEO of the Indiana Bankers Association. “But at some point in the conversation [among bankers], this issue always comes up.”

Paying large transactions first, as the lawsuit accused Fifth Third of doing, can increase the number of overdrafts, the Federal Deposit Insurance Corp. acknowledged in a 2009 study.

A customer with a $50 account balance and a total of five transactions—one at $100 and four at $10—will be hit with five overdraft charges by a bank processing largest to smallest but only one charge by a bank processing smallest to largest, the FDIC said.

The study gave no recommendations but rather provided guidance to help banks “develop more effective overdraft programs to better serve customers,” the FDIC said.

Results of the survey showed 47.2 percent of banks that participated in the study processed transactions by smallest-to-largest and 24.7 percent by largest-to-smallest. In addition, 18.2 percent processed by check number and just 7.6 percent by order of receiving ATM and debit-card transactions.

But among the largest banks, those with at least $1 billion in assets, the study revealed that more than half, or 53.7 percent, processed transactions largest to smallest.

In the two years since the study, and in light of the recent class-action lawsuit, DeHaven thinks more banks have switched to processing transactions by date, or will.

“You’re potentially creating a problem for yourself [if you don’t],” he said, “and that’s the largest concern right now.”

The American Bankers Association in Washington, D.C., has not taken a position on the issue.

“Every bank has its own business model, and it really comes down to a business decision—what the bank feels is best for its consumers,” ABA spokeswoman Carol Kaplan said.

New York-based Chase, which has about 100 branches in the Indianapolis metro area, changed its processing method last year as President Obama signed into law a sweeping overhaul of lending and high-finance rules.

The rules include banning banks from charging overdraft fees without first getting permission from the customer.

Chase customers who opted out of overdraft protection will have their debit cards declined at time of sale if their accounts lack sufficient funds, Chase spokeswoman Nancy Norris said.

“We believe we’re doing it the way our customers want us to do it,” Norris said of the bank’s switch to processing by order instead of amount.

At the opposite end of the spectrum, tiny Heartland Community Bank in Franklin, with six area branches and $233 million in assets, for years has been processing transactions by check number and electronic purchases by date.

It’s fairest for customers, maintained CEO Steve Bechman, noting “it’s hard to argue with that reasoning.”

Regardless of what method banks use, DeHaven at the Indiana Bankers Association has a simple yet likely unachievable solution for all banking customers that could solve the problem.

Said DeHaven: “Put enough money in your checking account so they all clear. But we all know that’s not going to happen.”•

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