[worldadventurer]

Bank of America had some pretty bad practices where they would reorder the sequence of debit transactions, largest amounts first, to maximize the number of overdraft transactions: "the bank mixed up the order and delayed the timing of debits and transactions to maximize the possibility customers will overdraft accounts".

They got sued and settled for $410 Million in 2011: http://www.bloomberg.com/news/articles/2011-02-05/bank-of-am...

[edit: spelling mistake]

[zacwest]

Their argument for doing is compelling. They figure larger purchases like rent or car payments should go through above smaller ones. It feels like the person doing the reordering was a different person from the one setting charges.

[jellicle]

Err, their explicit practice is to send through ALL purchases; that's sort of the point of milking the overdraft cow.

The person doing the reordering is exactly the same one setting the charges. The reordering is done to maximize profit.

"Bob, here are five transactions. You must process them all sequentially. No law regulates the order you must process them in. They were received in order A,B,C,D,E, however you need not process them in that order. Processing them in the order C,D,B,A,E maximizes the profit for us, your employer. What order should you process them in, Bob?"

[meric]

That's a ridiculous argument by the bank.

1. A person has many payments to make, some very large ones, but also some very small ones - and yet the variance in utility of making many of the payments is a lot smaller than the variance in the size of the payments to be made.

2. The utility of a creditor in receiving the majority of their payments is a lot higher than the utility of a creditor in receiving none of their payments.

A person requires BOTH shelter and food.

This month, your payments are:

    1. The food payment is $20.
    2. The rental payment $1000.

Let's say you have only $1000 for the month, and overdraft is turned off.

If the rental payment goes through, you have zero dollars remaining for food, leaving you hungry for the month, and will starve to death without assistance.

If the food payment goes through, you have $980 left. Send the $980 to the landlord and apologise and promise $20 will be sent the next month. Your landlord won't kick you out.

Ergo, largest payments should not go through above smaller ones, if we want to order in a way for the customer's benefit.

Therefore, taking into account of both parties, utility is maximised when a couple of percent of a large payment is skipped rather than when the entire amount of a small payment is skipped.

From the point of the view of the bank where they are usually the ones receiving the largest payments in mortgages and car loans, they will require a lot more customer support staff if there are lots of instances where people pay only 98% of their payments, because that's not a good reason to foreclose on somebody and at the same time they don't want them to continue skipping 1-2% of their payments.

What the bank is saying: Largest payments should go through above smaller ones, for the benefit of the bank!