Question

BYP7-3 Banks charge customers fees of up to $40 per cheque for writing "bounced" cheques; that is cheques that exceed the balance in the account. It has been estimated that processing bounced cheques costs a bank roughly $5 per cheque. Thus, the profit margin on a bounced cheque is very high. Some banks process cheques from largest amount to smallest. By doing this, they maximize the number of cheques that bounce if a customer overdraws an account. Ethics Case Instructions (a) Who are the stakeholders in this situation? (b) Antonio Freeman had a balance of $1,200 in his chequing account on a day when the bank received the following five cheques for processing against his account: Amount Cheque Number Amount Cheque Number $550 $ 35 3165 3150 180 3169 1,175 3158 400 3162 Assuming a $35 fee per cheque is assessed by the bank, how much fee revenue would the bank generate if it processed cheques (1) from largest to smallest, (2) from smallest to largest, and (3) in the order of the cheque numbers? (c) Do you think that processing NSF cheques from largest to smallest is an ethical business practice for a bank? (d) Besides ethical issues, what else should a bank consider when it decides if it should process cheques from largest to smallest? (e) If you were managing a bank, what would be your policy on bounced cheques?

Answer 1

a. The stakeholders involved in this case are the bank, the customers and the investors of the bank.

b.

(1)

Balance	1200
Less: Cheque 3158	1175
	25
Revenue (4*35)	140

(2)

Balance	1200
Less: Cheque 3150	35
	1165
Less: Cheque 3169	180
	985
Less: Cheque 3162	400
	585
Less: Cheque 3165	550
	35
Revenue ( 1* 35)	35

(3)

Balance	1200
Less: Cheque 3150	35
	1165
Revenue ( 4* 35)	140

(c) It certainly an ethical issue for the bank to charge higher bounce charges and then process the cheques from the largest to the smallest just to make a monetary gain and extra profits.

(d) This only will lead to customers loosing confidence and trust in the bank over time and may label it as a money mongering one. Also, competitors may not charge such fees on cheque bounces which can result in customers moving their accounts to such banks. This will cause additional revenue loss to the business.

(e) The bank can penalize customers when there are bounce of the cheques since processing the cheques again requires additional man power time and service charges. However the fees should be exorbitant in a way that will make the customers withdraw from the bank altogether. The profit margin must be similar for all the products of the bank.