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Another Big Blow to Banks’ Bottom Lines

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When banks instituted overdraft protection for customers’ checking accounts, it certainly seemed like a godsend to those who made this error with some regularity.  Then, the fees increased, often to $35 per incident, and some savvy customers figured out that the banks had been messing with the order of transactions, enabling them to levy the maximum number of fines. Lawsuits ensued, and banks have been ponying up big bucks to settle the complaints.

Why would banks behave in a way that infuriated customers and placed them squarely in the path of litigation, just to make a little extra cash? Well, the numbers are being crunched, and The Street reports that it's more than a few measly dollars that will be trimmed from the banks’ coffers once expected regulations from the Consumer Financial Protection Bureau are announced. The rules will require banks to process transactions sequentially, instead of largest to smallest -- which usually resulted in many, smaller overdrafts, each with its own penalty attached.

Overdraft fees were definitely not chicken feed
The amount of revenue that's estimated to be lost is staggering. For Bank of America (NYSE: BAC  ) , the amount could add up to 3% of its 2013 estimated earnings, or a cool $480 million. Other banks that would face a similar percentage loss are SunTrust, Huntington Bancshares (Nasdaq: HBAN  ) , and M&T Bank (NYSE: MTB  ) . Regions Financial (NYSE: RF  ) could lose around $63 million, or 4% of next year’s revenue.   

These are large amounts of money, and proves just how lucrative these shady bank practices can be, and why banks are so loath to part with them. To its credit, however, Bank of America quit the out-of-order sequencing of transactions some time ago, as did Citibank. Meanwhile, JP Morgan Chase (NYSE: JPM  ) stopped assessing overdraft fees on transactions under $5, possibly to avoid the $38 cup of coffee scenario, whereby a $3 overdraft resulted in a $35 penalty. For the most part, banks have not stopped the practice – though Huntington, bowing to pressure back in 2010, began giving customers an extra day to cover an overdraft without penalty.

Fool’s Take
As banks struggle to regain the cash flow of their former glory days, they have been misstepping badly, and these mistakes are beginning to affect their balance sheets. Since the financial crisis, consumers are less apt to put up with what they feel is unfair treatment, and are suing and demanding that regulators put a stop to the disputed practices. The amounts of money that banks are paying out in settlement costs are cancelling out any profit, it seems. For example, B of A paid $410 million to settle overdraft complaints early last year -- just a bit less than the estimated loss in overdraft fee revenue for next year.

Like any business, banks need to make money, but they also need to make it legitimately, so that investors aren’t constantly dealing with the losses and settlement costs that all these sneaky dealings eventually cause.  How many more of these scandals will come to light before investors have had enough?

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Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Huntington Bancshares, JP Morgan Chase, Bank of America, and Citigroup. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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