According to Reuters,
) announced the settlement of a lawsuit, which was filed by its
customers, by paying $55 million. The lawsuit accused this Wall
Street giant for manipulating overdraft fee related activities.
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The lawsuit, pending before the U.S. District Judge James Lawrence
King in Miami, is part of a litigation comprising 35 different
US Bancorp was accused of manipulating transaction entries to
generate hefty 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 these were received.
As a result, customers' balances diminished faster, resulting in a
larger number of overdrawn transactions, each of which then became
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 the
regulatory restriction on debit card usage fee, overdraft fees have
become an important revenue driver for banks.
Previously, in case of 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 cases, 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.
Nevertheless, according to the new regulation passed in 2010, banks
will not be able to charge such hefty fees without informing the
account holders. In fact, as per the new federal laws, the
customer's permission is required, before allowing any overdrafts.
The overdraft lawsuit settlement will help reduce US Bancorp's
litigation overhang to some extent. However, it will also drain out
the company's funds besides denting its image.
Yet, US Bancorp is not the only institution to settle such a
lawsuit. In fact, several banks have been sued on similar grounds.
Last week, PNC Bank, a unit of
PNC Financial Services Group Inc.
) also agreed to pay $90 million for similar allegation. Notably,
in the past one year,
Bank of America Corp.
JPMorgan Chase & Co.
) have agreed to pay millions to settle such claims.
Among other large financial institutions under the purview of such
charges that have not yet come up with the settlement include
Capital One Financial Corp.
US Bancorp retains a Zacks #3 Rank, which translates into a
short-term Hold recommendation. Considering its fundamentals, we
also maintain a 'Neutral' recommendation on the stock.