Banks charge fees of up to $45 for bounced cheques; that is, NSF cheques that exceed the balance in the payor's account. It has been estimated that processing bounced cheques costs a bank less than $5 per cheque. Thus, the profit margin on bounced cheques is high. Recognizing this, banks process cheques from largest to smallest within the same date range. By doing this, they maximize the number of cheques that bounce if a customer overdraws an account.
Instructions
(a) Who are the stakeholders in this case?
(b) Freeman Corp. had a balance of $1,500 in its chequing account on a day when the bank received the following five cheques for processing against that account:
Cheque Number Amount
3150...................................$ 35
3158.................................1,510
3162....................................400
3165....................................890
3169....................................180
Assuming a $45 fee is charged by the bank for each NSF cheque, how much service charge revenue would the bank generate if it processed cheques (1) from largest to smallest and (2) from smallest to largest?
(c) Do you think that processing cheques from largest to smallest is an ethical business practice?
(d) Besides ethical issues, what else must a bank consider in deciding whether to process cheques from largest to smallest?
(e) If you were managing a bank, what policy would you adopt on bounced cheques?