Big Banks Prey on the Poor

Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor.

– Thomas Jefferson

Being broke can cost you big bucks. Not only is it difficult for poor people to afford necessities like food and shelter, but basic services can also cost much more when you are low on funds. Take, for example, bank fees. Many employers require direct deposit for employees. Banks are eager to supply debit cards for “convenience,” but debit cards can carry hidden fees. No bank fee is more dangerous to the poor than the overdraft fee.

Recently, the Ninth Circuit Court of Appeals upheld a California federal court decision ordering Wells Fargo to pay $203 million in restitution for misleading practices in connection with overdraft fees. See Gutierrez v. Wells Fargo, 2014 WL 5462407. At the heart of the matter was how Wells Fargo applied its overdraft fees.

From 2005 to 2007, Wells Fargo made $1.4 billion in overdraft fees. Its practice during that time was to post debits at the end of the day starting with the highest dollar amount and ending with the lowest. This ensured that the funds in an individual’s account were depleted faster, which increased the likelihood of overdraft fees.

For instance, suppose you have $20 in the bank at the start of your day. You use your debit card during the day to get a coffee for $1.00, a cheap lunch at Taco Bell for $5.00, and you put $13.00 worth of gas in your car. You were careful to leave $1.00 in your bank account. Only you forgot that Netflix charges you $7.99, and that’s today!

Under a “chronological” policy, the Netflix debit would cause one overdraft. Under Wells Fargo’s policy, the largest charge is debited first. The ledger sheet for our example looks like this:

Charge Amount Balance
Gas $13.00 $7.00
Netflix $7.99 -$.99
Taco Bell $5.00 -$5.99
Coffee $1.00 -$6.99

That’s three overdraft charges which can range from $15-$40, depending on the bank’s policy. The appellate court upheld the trial court’s finding that the “decision to post debit-card transactions in high-to-low order was made for the sole purpose of maximizing the number of overdrafts assessed on its customers,” and that Wells Fargo misrepresented the way debit transactions were posted in consumer disclosures.