Personal Finance: Citi to start clearing smaller checks first- Consumer advocates call move a step in the right direction

By Candice Choi AP Personal Finance Writer NEW YORK (AP) -- Citibank will soon start clearing customer checks in a way that minimizes the potential for multiple overdraft charges. In an internal memo sent Monday, the bank said it will process checks starting with the smallest amounts first as of July 25. Most large banks process larger checks first, a practice consumer advocates say increases the potential for multiple overdraft violations on checking accounts. Customers are being notified of the change in statements this week. The new check clearing method will only affect consumer checks. Citi does not process overdraft debit transactions or ATM withdrawals. The change comes as overdraft programs continue to draw criticism from consumer watchdogs. A new regulation that went into effect last year requires banks to obtain consent from customers before enrolling them in overdraft protection for debit transactions. But banks can still automatically enroll customers in overdraft protection for checks and automatic payments, a loophole that rankles consumer advocates. "If the point is to minimize overdraft fees, banks should extend the opt-in setup to checks too," said Ruth Susswein of Consumer Action. Still, she said Citi's decision to do away with the high-to-low check clearing process was a step in the right direction. The banking industry has long defended the high-to-low method of processing checks as pro-consumer, however. Banks say bigger checks tend to be for more important payments that customers want paid first. For example, having a mortgage payment returned is usually more damaging than having a small check returned, notes Nessa Feddis, general counsel for the American Bankers Association. "The whole payment order has been debated for decades," Feddis said. "Whether customer wants high-to-low or low-to-high depends on their circumstances." Consumer advocates nevertheless say the high-to-low practice is a way for banks to rake in more overdraft charges, which are often as much as $39 per violation. The fee is $34 per violation at Citi. In the bank memo obtained by The Associated Press, consumer and commercial banking president Cece Stewart states that the change is a response to customer feedback. In explaining how the change will work, she cites the example of a customer who has $100 in an account. If the customer writes checks for $90, $35 and $25, Citi would currently clear the $90 check first, meaning the two smaller checks would result in overdraft charges. Under the new check clearing process, however, the smaller checks would be cleared first and the customer would only incur one overdraft penalty fee for the larger check. Stewart said she believes Citi is the first major bank to adopt a low-to-high check clearing system. The move is small victory for consumers in the broader checking account arena, however. In the past year, banks have hiked monthly fees, imposed stricter minimum balance requirements and taken away rewards programs to brace for a sharp decline in revenue from checking accounts. As part of the sweeping financial overhaul last year, the Federal Reserve proposed a cap on the fees banks can collect from merchants whenever customers swipe their debit cards. Banks say the Fed's current proposal could slash the $16 billion they collect each year from stores by up to 90 percent. Late last year, a revamp of checking accounts at Citi resulted in higher monthly fees for many customers. Bank of America is also testing new fees on checking accounts that are expected to be rolled out next year. Chase, PNC Bank and Wells Fargo recently said they would end or curb their rewards programs for debit cards. Citi still offers debit rewards. But like other banks, it is likely eyeing additional changes in the months ahead that may not be so welcome by consumers. Published: Wed, Apr 6, 2011