Banks Are Manipulating Transactions for Overdraft Fees – What You Can Do

Modern banks have their roots in Western Europe. In the old coffeehouses of London of the 16th century, loosely-organized moneychangers did business with patrons. This went on until the London Royal Exchange was founded in 1565. Soon after, in the early 17th century, the center of trade (and therefore banking) moved to the Netherlands and evolved into what we know as banking today.

Things have evolved quite a bit since those early days of banking. In the modern age, banks have come to represent something solid and dependable – institutions upon which the customer can depend. This is definitely the image that most banks’ marketing staffs and architects want you to perceive. It is for this reason that most banks – especially their headquarter offices – are located in imposing-looking structures made of marble or steel, while others are housed sky scrapers built to impress.

Indeed, banks have every interest in the public viewing them as dependable, reliable places to put one’s money. That is why a recently-introduced practice called “transaction stacking” is causing such a stir among consumer advocates. This is a deliberate method that banks engage in to increase your chances of incurring overdraft fees to your account, which means more profits in banks fees for the banks.

Here’s how it works: say you have $50 in your checking account. On that day, you make several debit charges, in this order: $2 for a pack of gum, $5 for a cup of coffee, $8 for some office supplies, and $45 at the service station. If your bank processed these transactions in order, you would have to pay a single overdraft fee ($35, in the case of many banks). But, with transaction stacking in play, your bank will purposefully process the transactions from largest to smallest, which means you would pay three overdraft fees (for the gum, coffee and office supplies purchases). That’s $105 in charges vs. $35 if they hadn’t engaged in this deceptive practice.

According to a 2008 Consumer Federation of America survey, most major, household-name banks are manipulating transactions in this way. Of course, the banks claim that the reason they do this is to prioritize larger transactions like mortgages that, if rejected, might jeopardize the customer. However, many consumer advocates believe that banks are manipulating transactions for overdraft fees.

If you believe your bank is doing this, here are some things you can do:

1. Keep an extra padding of at least $100 in your account at all times:
   This is probably the most failsafe way of avoiding overdraft fees due to transaction stacking. But, it’s not easy for everyone to maintain, given the unpredictability of life.
2. Link a backup savings account to your checking account for overdraft protection:
   Most banks offer savings accounts or secondary checking accounts that can act as reserves of sorts. When you overdraw your primary account, your bank can transfer money automatically into your primary checking account.
3. Watch your transactions more carefully:
   This one sounds obvious, but it is also true: if you have the time, check your account balance twice per day. Within online access, this is easy. Remember: your posted balance is not always your final balance, since it may not yet reflected checks that already show as being “paid.” This is confusing and could throw off your calculations – so you will need to pay close attention.
4. Switch to a bank that does not charge for overdraft fees:
   By far the simplest solution is to switch to a bank that does not charge overdraft fees. There are few, but a growing number, of banks who will actually cover your charges even if you overdraw your account. But, even then they will NOT charge you an overdraft fee. Switching banks may sound like a pain, but doing so could save you hundreds per year in fees.

Educating yourself about how banks really operate “behind the scenes” can help you to manage your expenses and income in a smarter way, reducing the fees you pay each month.