Commerce Bancshares Inc. ( CBSH ) has hit the headlines for manipulating overdraft fees. Last week, the U.S. District Court of Southern District of Florida (Miami) ordered CBSH to pay back $18.3 million to its customers, who were charged with inappropriate overdraft fees by the company.
The court has held CBSH responsible for manipulating transaction entries to generate larger overdraft fees. Besides, 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 is chargeable.
Though CBSH did not admit to any wrongdoing, it has agreed to settle the lawsuit filed by customers and avoid further expenses
Generally, 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 rise in debit card usage, overdraft fees have become an important revenue driver for banks.
Furthermore, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts through debit purchases, ATMs, or any other electronic payment gateways. However, at times, customers were not intimated of such fee details, and it came in their knowledge only after they had already been charged.
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.
CBSH is not the only bank that has been ordered to return money for its unfair overdraft practices. In November, Bank of America Corporation ( BAC ) paid back $410 million to more than 13 million customers, who were charged with inappropriate overdraft fees by the company over the last decade. Last year also, Wells Fargo & Co. ( WFC ) had been ordered to repay $203 million by the U.S. District Court of Northern California to recompense customers, who had sued the company for charging unfair overdraft fees.
Apart from BofA and Wells Fargo, in October 2011, Zions Bank, a subsidiary of Zions Bancorp. ( ZION ) was accused of charging improper overdraft fees under policies that were in place between 2005 and 2010.
The settlement of overdraft fees is expected to restore confidence of the customers in the federal laws to certain extent.
We believe that the recent financial regulations will have a negative impact on both the top line and the bottom line of CBSH, with restricted revenues and increased compliance and litigation costs. However, economic improvement and the company's strategic efforts would help it recover in the upcoming quarters.
CBSH currently retains a Zacks #2 Rank, which translates into a short-term 'Buy' rating. However, considering the fundamentals, we are maintaining a long-term "Neutral" recommendation on the stock.