Zacks_Analysts' Blog : Zions Sued for Undue Overdraft Fees - Analyst Blog

In a class action lawsuit filed last week, Zions Bank, the banking subsidiary of Zions Bancorp. (ZION) has been accused of charging improper overdraft fees under policies that were in place between 2005 and 2010. The lawsuit states that Zions’ overdraft fee policies made its almost impossible for the customers to avoid them even after regular monitoring of their accounts.

The lawsuit filed by three law firms on behalf of a customer charges Zions of manipulating transaction entries to generate larger overdraft fees. Transactions were re-sequenced by the bank in such a way that the largest withdrawals were deducted first instead of being cleared in the order, in which they were received. Hence, customers’ balances dwindled faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable.

Additionally, Zions has been accused of not posting deposits ahead of debit transactions, which also led to the account being overdrawn. All these practices were mainly aimed at drawing excessive overdraft fees from the customers.

An overdraft occurs when withdrawals from a bank account exceed the available balance. In such cases, banks charge fees for the overdrawn transactions from the account holders. With a rise in debit card usage, overdraft fees have become an important revenue driver for banks. Furthermore, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts through debit purchases, ATMs, or any other electronic payment gateways.

However, at times, customers were not intimated of such fee details, and they came to know it only after they had been already charged.

Nevertheless, according to the new regulation passed in 2010, banks will not be able to charge such hefty fees without informing the account holders. In fact, as per the new federal laws, the customer’s permission is required prior to allowing several overdrafts. Therefore, Zions as per its customer deposit agreement started processing debit card and ATM transactions from the lowest dollar amount to the highest from May this year.

Zions is not the only bank that has been sued for unfair overdraft practices. Last year, Wells Fargo & Co. (WFC) had been ordered to pay $203 million by the U.S. District Court of Northern California to recompense customers who had sued the company for charging unfair overdraft fees.

Although the filing of lawsuit against Zions will dent the company’s reputation, it will restore customers’ confidence in the federal laws to an extent.

Zions currently retains a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. Also, considering the fundaments, we maintain a long term “Neutral” recommendation on the stock.