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.
Do any American banks do this in a "first presented, first paid" way? My recollection from the dim dark recesses of my banking lawyer days in Australia was that a lot of banks did it that way there, and possibly in the UK as well?
Posted by: Jacqui Lipton | April 06, 2011 at 06:36 PM
I don't know. The answer may depend on whether checks are processed in "real time," rather than at designated times as they accumulate.
Posted by: Tim Zinnecker | April 06, 2011 at 07:55 PM
Does it really depend on that? Don't the banks log the times at which checks are presented so wouldn't it be easy to program the system to process them in that order?
Posted by: Jacqui Lipton | April 07, 2011 at 10:34 AM
Perhaps, but I'm guessing that checks just don't trickle in, but rather arrive "in bulk" (either physically, or electronically). And if they arrive in bulk, and are machine-processed, the bank's software must be programmed to address daily overdraft concerns. You suggest that perhaps banks just pay until the account balance hits zero (or, if permitted by contract, overdraft protection is available). Banks certainly could pay "in order" of presentment (even if presented nano-seconds apart). Maybe in the long run that would make both the drawer and the drawee happy. But if a bank is looking for a way to generate additional fee income ....
Also, I'm wondering how much check processing is "farmed out" and no longer done in-house. I don't know the answer to that. But it seems that banks within a particular geographic area could achieve some economic efficiency if they utilized the services of a central check processing entity (or maybe the Fed does this for its member banks).
I'd welcome insights (from Jacqui or others) on the technical details of check processing.
Posted by: Tim Zinnecker | April 07, 2011 at 11:18 AM