WARNING: This post includes a citation to the Uniform Commercial Code. Viewer discretion is advised.
Assume that a bank is presented on a single day with multiple checks drawn on the customer's account. No big deal if the account has sufficient funds to cover all of the checks. But what if the account has a balance insufficient to cover all of the checks? ("How could this occur?" you might ask. Perhaps the customer has made an innocent math error in tracking the account balance. Or perhaps the customer erroneously assumed that certain checks might not be presented for payment until after upcoming payroll deposits would hit the account.) Now the bank must decide in which order it will pay the checks, creating the possibility that some checks will be dishonored (or perhaps be subject to overdraft charges).
As a general rule, the UCC gives the bank complete discretion in determining the order in which checks will be paid. (See 4-303(b).) A few years ago, a student directed my attention to this article in USA Today, which indicated that eight of the nation's ten largest banks paid same-day checks in the order of largest to smallest. If we assume that the largest checks we write may be the most important (e.g., monthly mortgage and car note payments), then the policy makes some sense. The trade-off, though, is that under such a policy the number of checks that may be adversely affected increases. And as that number increases, so, too, might the various fees.
Now comes word that Citibank will start paying checks in the order of smallest to largest in a few months.
Good idea? I suppose it depends. If you keep a minimum balance in your account and avoid jaw-dropping math errors, you probably don't care about the policy because it rarely, if ever, affects you. But if you're living from paycheck to paycheck and struggling to make ends meet, then maybe you'll see a reduction in those annoying fees. (But might your chances of a mortgage default or a vehicle repo increase?)
Will other banks follow Citibank's action? Only time will tell. My guess? Don't expect a stampede.