Instead of opening up a window and yelling, though, Charlton is taking one of Greater Cincinnati’s largest corporations to court in a legal showdown that potentially could affect thousands of local banking customers.
Facing a weekend full of errands and shopping last spring, Carlton knew he had $428.98 in his checking account, which was enough to cover all he needed to accomplish — or was pretty close.
On a Saturday afternoon in April, Charlton paid for five small transactions using his debit card, totaling $56.39. The next afternoon, on a Sunday, he decided to buy some clothes at a local shop that sells business suits and spent $421.88 using the card.
When he saw his bill, Charlton realized he probably exceeded his account balance by $49.29 and figured Fifth Third Bank, the card’s issuer, would charge him a single $33 overdraft fee, which he was willing to absorb for the sake of convenience.
On Monday, no activity occurred on Charlton’s account and he didn’t receive a notice from Fifth Third regarding the overdraft from the previous day. On Tuesday, however, the bank processed four transactions, beginning with the largest purchase from Sunday although it was the last item received by the bank.
The next day, on Wednesday, an overdraft fee of $132 was assessed against Charlton’s account for the first time. The fee represented a $33 charge for each of the four items that were posted to his account Tuesday and were for purchases made on Saturday, when his account had sufficient funds for all five purchases.
To make matters worse, the bank processed two remaining items. As a result, on Thursday, Charlton was assessed an additional $66 in overdraft fees for the two items that Fifth Third had held.
In all, Charlton ended up paying six overdraft fees totaling $198 even though his account should have been overdrawn just once if the transactions had been processed in the order they were made.
That didn’t seem fair, Charlton thought. More importantly, he decided, it didn’t comply with the written policies that Fifth Third gives to customers along with their debit cards.
Under Fifth Third’s overdraft protection plan, customers who use debit cards for transactions that require payment in excess of the amount of cash in a checking account would have those transactions paid in full up to a pre-determined limit, with certain fees assessed for each transaction in which the overdraft protection was used.
In reality, Fifth Third bundles together transactions and reorders their sequence in an effort to maximize fees and increase profits without disclosing that practice upfront to customers, Charlton concluded. That’s when he decided to contact a lawyer.
Charlton filed a class-action lawsuit Oct. 9 against Fifth Third on behalf of all of its debit card customers. In the suit filed in Hamilton County Common Pleas Court, he alleges the bank engages in deceptive business practices that constitute a breach of contract with customers.
“We think, in terms of the way they disclosed it, Fifth Third can’t do what it’s doing,” says Richard S. Wayne, Charlton’s attorney.
Debit card transactions are different than purchases made by check, Wayne adds, and shouldn’t legitimately involve any delays in posting to accounts.
“Presumably, because it’s all computerized, when you use a debit card it goes directly into your account and drags the money out,” Wayne says.
Fifth Third successfully pushed to have Charlton’s suit moved to U.S. District Court, but Wayne has filed a motion to return it to the lower court. Both sides are waiting on that decision as well as another decision about whether the suit will be granted class-action status.
Such lawsuits usually take between 12 to 18 months to reach trial, legal experts say. Fifth Third serves more than 5.8 million customers, a large portion of whom use debit cards and could be affected by the outcome.
Fifth Third declined comment on the lawsuit.
“We do not comment on matters of active litigation,” says Debra DeCourcy, a company spokeswoman.
Fifth Third operates more than 1,300 locations in Ohio, Kentucky, Indiana, Florida, Georgia, Illinois, Michigan, Missouri, North Carolina, Pennsylvania, Tennessee and West Virginia.
The bank is among the largest money managers in the Midwest and has $196 billion in assets under its care, managing about $30 billion for individuals, corporations and not-for-profit organizations.
For fiscal year 2007, Fifth Third reported revenues of $8.49 billion and net income of $1.07 billion.
Under Fifth Third’s overdraft protection plan, each time the service is activated a fee is charged to the customer’s checking account. The bank adjusts these fees based on prior 12-month usage of the overdraft protection service, with fees assessed at a rate of $9 per transfer for one to10 uses, $15 per transfer for 11-20 uses and $20 per transfer for 21 or more uses.
The rate structure provides Fifth Third an incentive to maximize the number of times a customer’s overdraft protection service is activated, according to the lawsuit. The bank also imposes overdraft charges of $33 per overdraft even though industry sources report that the actual cost to process overdraft checks is only 50 cents to $1 per check.
“It is reasonable to infer that the cost of processing overdraft debit card charges is even less,” the lawsuit states. “Thus, the fee imposed by Fifth Third is at least 22 to 66 times Fifth Third’s actual cost for each debit card overdraft.”
The lawsuit alleges that Fifth Third utilizes a computerized program that, instead of paying debit charges in the order in which they’re presented or incurred, reconfigures or reorders the charges incurred during a multi-day period and automatically pays the largest ones first.
“By intent and design, Fifth Third’s automated program does this solely so that the total number of overdraft transactions are maximized and, therefore, Fifth Third can charge its overdraft fees with respect to as many such transactions as possible and thereby maximize its revenue and profits, all to its substantial benefit and the substantial detriment of its customers,” the lawsuit states.
The practice of charging fees for bounced checks is a multi-billion dollar business.
A 1998 report by the Consumer Federation of America reported that such fees generated $5.2 billion in revenue annually. More recent estimates for 2003 reported by the Consumer Federation of America puts this figure at $30 billion.
If Charlton’s lawsuit is successful, Fifth Third would have to stop re-sequencing its processing of debit card purchases or more fully disclose the practice to customers, along with possibly paying punitive damages to those who’ve paid such fees in the past.
“Potentially thousands of people could be affected,” Wayne says. “We certainly want to see the sequencing stopped and the class compensated for their losses.”