A Small Victory for the Average Person - Overdrafts at Citi May Not do as Much Damage
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A Small Victory for the Average Person - Overdrafts at Citi May Not do as Much Damage

Traditionally, banks will process the largest outstanding debit to one's account first. This largest to smallest protocol results in more overdrafts, which result in more fees being aid to the bank. However Citibank is reversing the order to the benefit of all of its customers.

Banks are wiggling their way into consumer pockets in any way they can.  Take money out of an ATM one gets charged (sometimes both by the releasing bank and one’s own bank.)  Miss an average minimum balance or order a statement or cancel a check, one often has to pay.  But, the most devastating fees are often the overdraft fees. 

To maximize overdraft fees, banks have the keen rule to process the largest transaction first and work backwards.  So, one may over draft numerous times with outstanding checks.  Overdraft protection must be asked by the consumer and often requires maintenance of another account of additional fees so fewer consumers have it.  The median overdraft fee is $27 while the average is $17.  However, on Monday 4/5/2011 Citi Bank announced a reversal of the largest to smallest policy effective 7/25/2011.

To illustrate the difference in effect, suppose one has $1,250 in their account.  Now suppose that consumer writes a rent check for $1,200, cable payment check of $75, cell phone check for $110 and electric utility check of $90.  Granted that consumer should have been aware that they were beyond their means, but in this newer hand to mouth economy, these things happen. 

With the above example, banks would usually do the following (if all checks were cashed on the same day):

Customary bank with old rule:

Beginning Balance: $1,250

Less: $1,200

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Subtotal 1: $50

Less: $110 (overdraft)

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Subtotal 2: -$60

Less: $90 (overdraft)

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Subtotal 3: -$150

Less: $75 (overdraft)

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Total:  -$225

 

Note that there are three overdrafts, resulting in an average extra cost to the consumer of $51.

Using the same scenario, but with the smallest to largest transaction that Citi will begin implementing we see the situation much more manageable.

Beginning Balance: $1,250

Less: $75

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Subtotal 1: $1,125

Less: $90

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Subtotal 2: $1,035

Less: $110

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Subtotal 3: $925

Less: $1,200 (overdraft)

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Total:  -$275

 

The consumer still has a negative balance of $225, but was only subjected to one overdraft – costing $17, not 3 costing $51.

The rationale of the banks is that the larger transactions are more important (i.e. mortgage payments, insurance payments, etc.)  At this time Citi is a forerunner, with no one chasing them.  Bank of America and Chase, at this time have no plans to change their protocol.  This is a small victory, but is proving that elephants can learn how to dance.

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