In order to settle a lawsuit for alleged manipulation activities
related to overdraft fee, PNC Bank, a unit of
PNC Financial Services Group Inc.
(
PNC
) has agreed to pay $90 million, according to a Bloomberg report.
This lawsuit, pending before U.S. District Judge James Lawrence
King in Miami, is part of a litigation comprising 30 different
banks.
The Allegation
PNC was accused of manipulating transaction entries to generate
greater overdraft fees. Transactions were re-sequenced by the bank
so that the largest withdrawals were deducted first instead of
being cleared in the order in which they were received.
As a result, customers' balances diminished faster, resulting in
a larger number of overdrawn transactions, each of which then
became chargeable.
Notably, an overdraft occurs when withdrawals from a bank
account exceed the available balance. In such cases, banks charge
fees for the overdrawn transactions from the account holders. With
a rise in debit card usage, overdraft fees have become an important
revenue driver for banks.
Previously, if there were insufficient funds, checks were
returned and the account holders had to bear a charge. However,
banks found it easier to generate revenues through overdraft fees
by allowing customers to overdraw their accounts by debit
purchases, ATMs, or through any other electronic payment
gateways.
However, in many a case, customers were unaware of the details
of such fees and things came to light only after they were charged.
This was one of the major complaints made by customers against
banks since the onset of the recent financial crisis.
Our Take
The overdraft lawsuit settlement will help reduce PNC
Financial's litigation overhang to some extent. However, it will
also drain out the company's funds besides denting its image.
Yet, PNC Financial is not the only institution to settle such a
lawsuit. In fact, several banks have been sued on similar grounds.
Notably, in the past one year,
Bank of America Corp.
(
BAC
) and
JPMorgan Chase & Co.
(
JPM
) have agreed to pay millions to settle such claims.
PNC Financial retains a Zacks #3 Rank, which translates into a
short-term Hold recommendation. Considering its fundamentals, we
also have a Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis
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JPMORGAN CHASE (JPM): Free Stock Analysis
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PNC FINL SVC CP (PNC): Free Stock Analysis
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