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.