The Impact of Check Sequencing on NSF (Not-Sufficient Funds) Fees

Aruna Apte (), Uday M. Apte (), Randolph P. Beatty (), Ila C. Sarkar () and John H. Semple ()
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Aruna Apte: Department of Information Technology and Operations Management, Edwin L. Cox School of Business, Southern Methodist University, Box 750333, Dallas, Texas 75275-0333
Uday M. Apte: Department of Information Technology and Operations Management, Edwin L. Cox School of Business, Southern Methodist University, Box 750333, Dallas, Texas 75275-0333
Randolph P. Beatty: Leventhal School of Accounting, Marshall School of Business, University of Southern California, Los Angeles, California 90089-1421
Ila C. Sarkar: Department of Applied Research, Louisiana Health Care Review, Inc., 8591 United Plaza Boulevard, Suite 270, Baton Rouge, Louisiana 70809-9921
John H. Semple: Department of Information Technology and Operations Management, Edwin L. Cox School of Business, Southern Methodist University, Box 750333, Dallas, Texas 75275-0333

Interfaces, 2004, vol. 34, issue 2, 97-105

Abstract: In a wave of litigation that has escalated into several class-action lawsuits, banks have been charged with sequencing checks unfairly to obtain higher fees for not-sufficient funds (NSF). The point of contention is the banks’ use of the high-low check-sequencing procedure, which presents checks for payment in descending dollar amounts. While it is likely that sequencing plays an important role in determining NSF fees, no studies rigorously analyze the theoretical and empirical properties of different sequencing policies and their financial impact on banks and customers. At the request of a litigation participant, we undertook such a study. We interwove several OR/MS tools, including distribution fitting, simulation, and integer programming. Our results show that sequencing is only half of the story; the other half concerns the role of overdraft protection. By clarifying the impact of check-sequencing policies, our study should help policy makers, regulators, and courts to arrive at a suitable resolution of the issues surrounding the public-policy debate on check-sequencing.

Keywords: financial institutions: banks; programming: integer; applications (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orinte:v:34:y:2004:i:2:p:97-105

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