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Citizens Bank Settles Overdraft Fee Lawsuit For $137.5 Million

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Citizens Bank is the latest bank to settle in a massive class action lawsuit over dodgy overdraft fee practices. On Wednesday, the midsize New England institution agreed to pay $137.5 million to settle the suit, which is part of a broader class action suit that involves more than 30 banks. A court must still approve Citizens' settlement.

Wednesday's agreement puts Citizens in the company of 12 other banks, including Bank of America and JPMorgan Chase, who have agreed to pay out settlements to customers who were charged unfair overdraft fees. At issue is the financial institutions' method of reordering debit-card transactions from highest to lowest amount--rather than in the order that the transactions occurred--in order to maximize the number of overdraft fees that could be charged to a customer.

All together the settlement money, including the latest agreement by Citizens, will return approximately $750 million to customers, according to the Boston Globe. It is a chunk of change, to be sure, but it represents a very small portion of the billions of dollars banks have made in overdraft fees.

Every settlement in this overdraft lawsuit has represented a different portion of the alleged damages, according to American Banker. In the case of the Bank of America suit, which was approved last fall, the $410 million settlement represented only 10 percent of the alleged damages.

The practice of reordering transactions was a major way for banks to charge customers additional overdraft fees -- typically from $25 to $35 per transaction -- and drive revenue for themselves. Regulation of overdraft protection adopted in 2010 changed the laws to require that banks make it an optional service, rather than the default for all customers. The result of that legislation has saved consumers billions in overdraft fees -- but has taken a major bite from revenue for all banks.

And that is just one of many reasons that has driven banks to increase other fees or add new pricey services. Some banks, like JPMorgan Chase, are putting a renewed focus on getting more high net worth customers.

Other banks, including large regional institutions like US Bank and Regions, are aiming to make money from their low-income customers by offering new services that come with a high-sticker cost, such as short-term loans and fee-laden prepaid cards. According to the New York Times, these services are growing quickly because they largely skirt the regulations that have been put in place over the last few years.

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