(Des Moines, Iowa/via the Iowa Capital Dispatch) – An Iowa bank is facing a potential class-action lawsuit claiming it has charged “crippling” overdraft fees to its customers’ accounts. The lawsuit, filed in U.S. District Court for the Southern District of Iowa, challenges Bankers Trust’s alleged practice of charging overdraft fees on debit-card transactions that have been authorized by the bank itself due to the availability of sufficient funds in the customers’ accounts. The Iowa Capital Dispatch reports the lawsuit centers on the controversial use of fees applied to so-called “Authorize Positive, Settle Negative” transactions, or APSN transactions.

The alleged practice works like this: The moment a purchase is made from a merchant using a debit card, the bank immediately reduces the customer’s checking account balance by the amount of that purchase. The bank also sets aside the full dollar amount of the purchase, holding that money in reserve for the merchant. However, the bank will then impose a $33 overdraft fee on the transaction if, days later when the bank forwards the reserved funds to the merchant, the customer’s funds are depleted and the account shows a negative balance. Essentially, the overdraft fee isn’t simply applied to transactions for which there are no funds; it’s imposed on transactions for which the bank is actually holding a customer’s cash in reserve to ensure payment.

The lawsuit alleges these “crippling” overdraft fees are unwarranted because a customer’s balance is always adjusted, in real-time, to account for every debit-card transaction at the precise instant the transaction is made. “Indeed,” the lawsuit alleges, “the entire purpose of the immediate debit and hold of positive funds is to ensure that there are enough funds in the account to pay the transaction.” The lawsuit alleges that while many banks and credit unions “that employ this abusive practice require their accountholders to expressly agree to it” when they open an account, Bankers Trust never did. Bankers Trust, the lawsuit claims, was fully aware that its customers believed they couldn’t be assessed overdraft fees for debit-card purchases given that the funds needed to cover those purchases were instantly set aside by the bank and held in reserve to ensure payment. “Besides being deceptive, unfair, and unconscionable, these practices breach contract promises” made to customers, the lawsuit claims. “In breach of these promises, (Banks Trust) assesses $33 overdraft fees when there is enough money in the account to cover the transaction.”

While some banks, including Bank of America, Capital One, Wells Fargo and others – have taken steps to eliminate such fees – some have not. The lawsuit claims Bankers Trust continues to assess overdraft fees on APSN transactions and that the bank “has made substantial revenue — to the tune of tens of millions of dollars — seeking to turn its customers’ financial struggles into revenue.” The Consumer Financial Protection Bureau has called APSN fees “unfair” and “deceptive,” noting that consumers typically have no reason to anticipate such fees since they aren’t always disclosed to consumers. In October 2022, the bureau warned that even if a consumer closely monitors their account balance and carefully calibrates their spending, they can easily incur an overdraft fee. When a customer checks their account balance online or at an ATM, the amount displayed may be sufficient to cover their planned purchases — but the balance in the account may not be sufficient to cover the purchases days later when the bank chooses to process the transactions.

In some cases, depending on the order in which a bank structures debit-card purchases, a customer can be charged multiple overdraft fees in quick succession, driving their account balance even further into the red. The lawsuit notes that banks can protect themselves from true overdrafts by simply rejecting transactions once an account shows insufficient funds. Instead, the lawsuit claims, banks process the transactions, hold the money for the purchases in reserve, and then impose the APSN overdraft fees as a way to generate millions in revenue at the expense of customers who can least afford such fees. The lawsuit seeks class-action status to represent not only Jones but all other Bankers Trust customers who have been subjected to APSN overdraft fees. It seeks unspecified damages for breach of contract and violations of the federal Electronic Funds Transfer Act.

Bankers Trust is headquartered in Des Moines and is the state’s largest privately held community bank. In addition to 12 branches serving central Iowa, Bankers Trust has branches in Cedar Rapids and Phoenix, Arizona, as well as an office in Omaha, Nebraska.