Overdraft

If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

The merchant William Hogg was having problems in balancing his books and was able to come to an agreement with the newly established bank that allowed him to withdraw money from his empty account to pay his debts before he received his payments.

With the onset of industrialization, new businesses needed an easy form of credit to jump-start their activities, without having to take out loans on securities they did not necessarily have.

The importance of this new financial innovation was recognized by the philosopher David Hume who described it in one of his essays as "one of the most ingenious ideas that has been executed in commerce".

[5] This reform introduced the following measures In 2006 the Office of Fair Trading issued a statement which concluded that credit card issuers were levying penalty charges when customers exceeded their maximum spend limit and / or made late payments to their accounts.

The Supreme Court in 2009 held that the OFT statement was not binding for current (checking) accounts and largely resolved the matter in favor of the banks.

[7] In the United States some consumer reporting agencies such as ChexSystems, Early Warning Services, and TeleCheck track how people manage their checking accounts.

Overdraft protection is a credit service offered by banking institutions primarily in the United States.

Overdraft protection can cover ATM withdrawals, purchases made with a debit card, electronic transfers, and checks.

However, ATM withdrawals and purchases made with a debit or check card are considered preauthorized and must be paid by the bank when presented, even if this causes an overdraft.

With the advent of large-scale interstate branch banking, traditional ad hoc coverage has practically disappeared.

This form of overdraft protection is available to consumers who meet the creditworthiness criteria established by the bank for such accounts.

[11] Larger banks tend not to offer bounce protection plans, but instead process overdrafts as disclosed in their account terms and conditions.

In either case, the bank may choose to cover overdrawn items at their discretion and charge an overdraft fee, the amount of which may or may not be disclosed.

Critics argue that because funds are advanced to a consumer and repayment is expected, bounce protection is a type of loan.

[13] Because banks are not contractually obligated to cover the overdrafts, "bounce protection" is not regulated by the Truth in Lending Act, which prohibits certain deceptive advertisements and requires disclosure of the terms of loans.

An area of controversy with regards to overdraft fees is the order in which a bank posts transactions to a customer's account.

If all of the items present for payment to the account on the same day, and the bank processes the largest transaction first, multiple overdrafts can result.

Consumers have attempted to litigate to prevent this practice, arguing that banks use "biggest check first" to manipulate the order of transactions to artificially trigger more overdraft fees to collect.

[15][16] In class action, U.S. Bank Corporation entered into a $55 million settlement agreement on January 16, 2014, over the practice of reordering transactions (highest-lowest) in posting debit card transactions to customer accounts and the alleged effect the posting order had on the number of overdraft fees charged to account holders.