The impact of check sequencing on NSF (not-sufficient funds) fees

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 non-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 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.