Annals of management consultancy advice, overdraft-fee edition

By Felix Salmon
September 27, 2011

It’s one of the oldest tricks in the retail-banking book: if you order your customers’ transactions from biggest to smallest, rather than in the order they’re received, then you’ll maximize your overdraft income. Every banker in the country knows this — to get the most overdraft fees, you have to push your customers into the overdraft zone as quickly as possible, by prioritizing their largest payments.

This truism is so blindingly obvious that it’s known even to management consultants like CAST, who were giving advice to Union Bank of California. In an insight typical of their kind, CAST told Union Bank that its fee income would rise if it ordered transactions from biggest to smallest.

But CAST didn’t stop there. To become a really successful management consultant, you need chutzpah:

Bank documents turned over to plaintiff attorneys during discovery indicate Union Bank agreed that CAST would receive 20% of any extra overdraft charges generated under its high-to-low system.

I can see why Union Bank would implement this system. I can even see why they might hire CAST to tell them to do it, so that they could blame The Consultants rather than take responsibility for their own actions. But paying CAST 20% of the extra fee income? That’s completely insane. And it’s a lot of money, too:

A system of putting through the transactions in whatever order maximized fees would in the first year boost Union Bank’s overdraft revenue by $18 million, or nearly 25%, CAST estimated…

In the summer of 2003, Union Bank established a “High to Low Implementation Team” in cooperation with CAST. In the first year, overdraft revenue jumped far more than expected — by $33 million to a total of $125 million.

So, CAST didn’t even get its math right! But at least it was lavishly rewarded for being wrong: 20% of $33 million is a very nice fee to pocket for telling a bank what it already knows. And the system stayed in place for six years — so that’s a good $40 million or so that CAST stands to have made from this advice. Nice work if you can get it!

If I were a Union Bank shareholder, I’d be angry about the horrible overdraft system. But I’d be furious that a large chunk of the extra fees were going to CAST for no good reason. Who agreed to this on behalf of Union Bank? And why? It makes no sense to me at all.


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A prior relationship between Union Bank leadership and CAST leadership? A conflict of interest in ownership or other revenue streams?

Posted by BarryKelly | Report as abusive

I think what you said today about Alessio Rastani is unfounded and ignorant. Day-traders have a lot of time on their hands? Sounds like the only person who has a lot of time on their hands is you sir…

Posted by Count_Laszlo | Report as abusive

As a banker I’m ashamed that banks went so far as to maximize overdraft fees. We’re I a regulator I would go as far as to mandate lowest to highest payment processing of physical checks presented for payment each night after any deposits were posted to the account.

Free checking and retail banking will still be profit centers without dishonest practices… they just won’t be as profitable.

Posted by y2kurtus | Report as abusive

Umm… shouldn’t that be 20% of $(125-33)M, or 20% of $92M (not $33M)?

Posted by samadamsthedog | Report as abusive

No, it’s 20% of 33M, times 6. Assuming no growth.

Posted by dbyaseen | Report as abusive

well it could well be because of some sort of results based billing situation between the bank and the consulting company. Why the bank would agree to that for basic advice is a mystery but really the arrangement to pay a consulting company a share of the additional revenue generated by their idea isnt that unusual. It can actually work pretty well for both the consultant and the bank if the advice is good.

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