JPMorgan to Return Overdraft Fees

The U.S. District Court of Southern Florida (Miami) has asked JPMorgan Chase & Co. (JPM - Analyst Report) to pay $110 million to settle a class lawsuit related to the charging of inappropriate overdraft fees to its customers. The court held the company responsible for manipulating transaction entries to generate larger overdraft fees, but this settlement has to be first approved by the U.S. District Judge in Miami.

The lawsuit filed by the customers stated that the transactions were re-sequenced by JPMorgan in such a way that the largest withdrawals were deducted first instead of being cleared in the order in which they were received. As a result, customers’ balances diminished faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable.

With a rise in debit card usage, overdraft fees have become an important revenue driver for banks. Further, 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 even informed about such fee details, and they would come to know about it after already being 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.

Hence, JPMorgan announced several changes to its overdraft fee structure. The company has stopped charging overdrafts without clients’ permission, lowered the maximum number of fees per day to three from six and revised the order of charges to recognize debit-card transactions and ATM withdrawals as they occur.

Similar Settlements

Last year, Commerce Bancshares Inc. (CBSH - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) were ordered to repay for their unfair overdraft practices. Commerce Bancshares paid $18.3 million while Bank of America was asked to pay a whopping $410 million to the customers to settle unfair overdraft fees charges.

Moreover in 2010, Wells Fargo & Co. (WFC - Analyst Report) was ordered to repay $203 million by the U.S. District Court of Northern California to recompense the customers who had sued the company for charging unfair overdraft fees.

Additionally, in October 2011, Zions Bank, a subsidiary of Zions Bancorp. (ZION - Analyst Report), was accused of charging improper overdraft fees under policies that were in place between 2005 and 2010.

Our Viewpoint

Though the announcement of settling unfair overdraft fees will affect JPMorgan’s financials, it will restore the confidence of the customers in the federal laws to some extent.

Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating.