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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Aruna Apte & Uday M. Apte & Randolph P. Beatty & Ila C. Sarkar & John H. Semple, 2004. "The Impact of Check Sequencing on NSF (Not-Sufficient Funds) Fees," Interfaces, INFORMS, vol. 34(2), pages 97-105, April.
    • Handle: RePEc:inm:orinte:v:34:y:2004:i:2:p:97-105
    DOI: 10.1287/inte.1030.0039
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