A class action lawsuit investigation is looking into overdraft fees practices at HSBC Bank and Capital One.

According to reports, HSBC and Capital One may have engaged in unfair overdraft fees practices that resulted in their customers paying more fees than they should have had to.

An overdraft protection service allows a transaction to be paid even if the banking customer doesn’t have enough money in their account to pay the transaction. Different overdraft protection plans work differently: some advance the necessary funds to the customer from a line of credit, and others draw funds from a linked savings account.

Without overdraft protection, a bank or credit union would simply refrain from honoring that specific transaction or check. The customer would then likely have to pay a nonsufficient funds fee, or NSF fee, plus whatever fee the merchant may charge after the transaction is denied.

Many financial institutions offer some sort of overdraft protection as a standard feature of their checking accounts. Protection for certain types of transactions, such as one-time ATM and debit card transactions, requires an affirmative opt-in from the customer.

Needless to say, this form of “protection” does come with a price, often termed overdraft fees.

Banks such as HSBC and Capital One now offer overdraft protection. However, concerns have arisen about the ways banks administer overdraft fees.

The overdraft fees are the charges posted to the account once the overdraft protection service has been used. Each time the bank pays a transaction despite insufficient funds in the account, the customer may have to pay an overdraft fee.

Overdraft fees are charged each time and for every transaction made to which funds in the account were insufficient. So once one transaction draws an account into a negative balance, that transaction and each subsequent transaction can incur an overdraft fee until the customer deposits enough funds to bring the account balance back to zero or above.

Investigations into HSBC and Capital One Overdraft Fees Practices

Consumer advocates are looking into whether some banks – HSBC, Capital One, and others – are administering overdraft fees in a way designed to maximize their revenues at their customers’ expense.

Some financial institutions have gotten in trouble for posting transactions to accounts in the order of largest-to-smallest transactions, instead of in chronological order. Paying larger transactions first can deplete the account sooner, causing more subsequent transactions to qualify for overdraft fees.

Purposefully posting transactions in a way that favors the banking institution is just one of possible deceptive overdraft practices that may be used. Other institutions may not be making the required disclosures of the terms of their overdraft protection programs.

In addition to HSBC and Capital One, other banking institutions currently being investigated include People’s United Bank; Bank of Oklahoma; UMB Bank; First Hawaiian Bank; America First Credit Union; American Airlines Federal Credit Union; Star one Credit Union; and First Technology Federal Credit Union.

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