PNC to Settle Overdraft Lawsuit

In order to settle a lawsuit for alleged manipulation activities related to overdraft fee, PNC Bank, a unit of PNC Financial Services Group Inc. ( PNC - Analyst Report ) has agreed to pay $90 million, according to a Bloomberg report. This lawsuit, pending before U.S. District Judge James Lawrence King in Miami, is part of a litigation comprising 30 different banks.

The Allegation

PNC was accused of manipulating transaction entries to generate greater overdraft fees. Transactions were re-sequenced by the bank so 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.

Notably, 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.

Previously, if there were insufficient funds, checks were returned and the account holders had to bear a charge. However, banks found it easier to generate revenues through overdraft fees by allowing customers to overdraw their accounts by debit purchases, ATMs, or through any other electronic payment gateways.

However, in many a case, customers were unaware of the details of such fees and things came to light only after they were charged. This was one of the major complaints made by customers against banks since the onset of the recent financial crisis.

Our Take

The overdraft lawsuit settlement will help reduce PNC Financial’s litigation overhang to some extent. However, it will also drain out the company’s funds besides denting its image.

Yet, PNC Financial is not the only institution to settle such a lawsuit. In fact, several banks have been sued on similar grounds. Notably, in the past one year, Bank of America Corp. ( BAC - Analyst Report ) and JPMorgan Chase & Co. ( JPM - Analyst Report ) have agreed to pay millions to settle such claims.

PNC Financial retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also have a Neutral recommendation on the stock.