July 30, 2010 at 9:00 AM ET
You didn't think banks would forgo billions of dollars in overdraft fee revenue without a fight, did you?
As an Aug. 15 congressionally imposed deadline approaches to stop collecting fees for most debit card-related overdrafts, banks are blanketing account holders with pitches designed to entice them back into the costly programs. Consumers are seeing pop-up ads when they log in to their online banking accounts and getting paper notices in the mail. Some are even getting pitched at bank branches or ATMs.
The enticements hawk rebranded overdraft coverage with varied names -- "courtesy pay," "Buffer Zone," "debit card advance," or simply "debit card overdraft coverage." But most of the pitches evoke the same logic: "If you want your account to continue to work as it does today, you will need to let us know," as one Chase ad says.
Banks currently often allow consumers to spend money they don't have in their checking accounts through a swipe of their debit card in a store or through an ATM withdrawal. Then they charge consumers about $35 for each transaction that exceeds their account balance. New Federal Reserve will require banks to decline those transactions as of Aug. 15 unless consumers have "opted-in" for overdraft coverage.
The new rules do not apply to paper checks or other forms of electronic payments.
Fearing a sharp loss in revenue, banks are making a hard sell to consumers to protect as much of that income as possible.
"NO FEE to keep Courtesy Pay Overdraft Protection coverage on your account. NO FEE if you never use it," brags a solicitation from the Arizona State Credit Union.
Some banks are even taking the opportunity to create new products, such as Citizens Bank's "BufferZone." According to a description of a bank brochure provided to msnbc.com by Jean Ann Fox of the Consumer Federation of America, consumers can pay $4.99 per month to buy a $30 "buffer" on their checking accounts.
"That means overdrafts will be paid and the overdraft fees waived as long as the overdrawn balance does not exceed the $30 buffer," the brochure says. "Keep small misses small. Sometimes it happens: your account is overdrawn by a couple of dollars, or even just a few cents. With BufferZone you can rest easy knowing that your small misses will stay small."
If you doubt the importance of the change, a visit to banking consultant Acton Marketing's Web site will probably change your mind. The site, which hosts a countdown clock that is ticking down the seconds to Aug. 15, brags that its marketing materials will help persuade "stubborn" consumers to opt-in.
Various estimates suggest that banks stand to lose between $10 billion and $15 billion in annual overdraft revenue from the change. Chase alone says it will lose $700 million in fee-based revenue this year.
As banks scramble to sign up as many consumers as possible, consumer advocates are crying foul. They charge that the banks' ads are misleading and that many are failing to clearly tell consumers they have far less expensive options for debit card overdrafts.
"The choice is between paying nothing and paying what they are charging," Fox said. "But we are starting to hear from people being asked (to sign up for overdraft coverage) over and over and over, every time they log in."
'If you don't do anything you won't pay anything'
Lauren Bowne, a staff attorney at Consumers Union, says the fact that any consumers have opted in to bank overdraft programs suggests the ads are misleading.
"If you don't do anything you won't pay anything. That's what all banks fail to say," she said. "Who knows what people are being told and why they are opting in."
It's hard to conjure up a scenario where overdraft coverage is a sensible way to cover a short-term cash shortfall, and the Consumer Federation of America recommends that account holders simply ditch the bank pitches. Still, there are some indications that marketing materials are working.
A survey by research firm The Nielsen Co. released in June found that 26 percent of consumers intended to opt in, and another 39 percent were undecided. An anonymous executive quoted in the American Banker last month said that 60 percent of consumers opt in when told their cash withdrawal requests will otherwise be denied at an ATM. And a reader who told Consumerist.com that he was a bank employee, claimed last month that 19 out of 20 account holders consent to opt in when pitched directly by a bank teller.
"All you have to do to get an almost definite yes is explain that opting in will keep their account exactly the way it is now. People are scared of change so they'll opt in to avoid change," he wrote.
'Do you want to pay 18 percent, or 120 percent, or 900 percent?'
The problem, Fox says, is that consumers aren't getting enough information to make an informed choice about the overdraft coverage. For years, consumer groups have argued that automatic overdraft coverage is a short-term loan, and should be covered by the Truth in Lending Act. If it were, many overdraft fees would be computed at 900 percent annual interest or more, and that rate would be included in all marketing materials. By that measure, other sources of short-term funding -- even many credit card cash advances -- would be cheaper. In fact, most consumers would be better off using a different product already offered by their bank.
"Banks need to spell this out in a clear format, " Fox said. "We have recommended that (the Fed) require banks to present the information in clear tabular format so, consumers see what all their options are and what they cost. When they say, 'Let us continue to cover your overdrafts, they're not giving you the cost information. It should say, do you want to pay 18 percent, or 120 percent, or 900 percent ?'"
A collection of Consumer groups took on Chase earlier this year when it sent out mailers that they said were intentionally confusing and failed to mention the $34 fee that consumer would pay for overdrafts if they opted in to Chase's overdraft coverage.
"The initial solicitation used scare tactics," said the Consumer Union's Bowne. It implied that consumers would lose rights and their debit cards would no longer work the same way if they didn't opt in, she said.
Chase altered its pitch materials, following some of the consumer groups' recommendations.
"Our goal with this process is to let consumers know there's a change coming, and encourage them to make an informed decision," said Chase spokesman Tom Kelly. He would not say how many account holders had signed up for the coverage. He described Chase's debit card overdraft coverage as part of "triple protection" consumers can have against overdrawing their accounts, along with other overdraft tools such as a linked savings account and text message alerts about low balances.
Not everyone is being inundated with opt-in ads, Bowne said. She said banks are specifically targeting consumers who she says can least afford it: account holders who have a chronically low balance. Marketing materials at Acton seem to support that claim.
"What you need to do to acquire the highest number of opt-ins, especially from the most important group — the regular NSF (non-sufficient funds) users," the firm says on its Web site.
Not all banks are joining the opt-in marketing party. Bank of America has already changed its overdraft policy and simply will not let consumers overdraw their accounts through debit card purchases. Other banks, such as like USAA Federal Savings Bank, have never allowed such overdrafts.
But the easy money is too hard for many institutions to pass up. When a consumer with a low balance swipes a debit card to pay for a transaction that would throw their account in the red, banks that don't allow the purchase lose two revenue streams: the potential overdraft fees and the interchange fee collected from the merchant for performing the transaction. if consumers get in the habit of pulling out another bank's credit card for transactions like these, debit-card issuing banks stand to lose millions in interchange fees, too.
Banks can continue to sign up customers after Aug. 15, so while account holders should expect a crescendo of overdraft protection marketing pitches in the next few weeks, they will continue for months.
"This whole monster has kept growing and growing since we first ran across it," Fox said. "It's not going away. … There's billions of dollars on the table."
Red Tape Wrestling Tips
It's always important to have a financial plan B. Many folks never think they'll face a negative account balance, yet by some estimates one in three account holders paid at least one overdraft fee last year. Even if you aren't at risk today, now is the time to prepare for a financial slipup.
But there is massive confusion over the best way to do that. You can decide if that's intentional or accidental, but let me sort it out for you.
The short answer: There is no reason for the vast majority of people to opt in for courtesy pay or whatever else it's called. The good news is, the default choice is the right choice, so you don't have to do anything. If you have already opted-in, the bank must allow you to opt back out, and you should.
But you should also find another plan B, and that's where the confusion comes in.
There is good overdraft coverage, and evil overdraft coverage. With good coverage, you are borrowing your own money, which is relatively cheap. With "courtesy pay" or "automatic overdraft coverage" you are borrowing the bank's money, which is very costly.
There are three easy ways to provide good overdraft protection: You can link a savings account, credit card or line of credit to your checking account. Once you do, if you bounce a check or exceed your balance with a purchase, the money will be dragged from your savings, credit card or line of credit into your checking account to cover the balance.
There is a cost involved. Chase charges $10 for each automatic transfer from savings to checking, for example. But that's still quite a bit cheaper than $35. Also, courtesy pay can result in multiple $35 charges for separate transactions on the same day, while linked accounts lead to only a single charge for each day.
Also, it's important to note that courtesy pay isn't guaranteed. Banks cover charges at their discretion. Finally, banks that extended overdraft coverage grab their money the instant account holders make their next deposit, which can lead to more low-balance troubles. Consumers who take advantage of linked accounts can replace the money at their discretion.
Many bank tellers aren't well trained in these distinctions, so it's important that consumers ask for them by name, Fox says.
"Say you want to link your checking account to your savings account. Don't ask for overdraft anything, there's too much confusion about what you are asking," Fox said.
Here's a handy chart of bank overdraft fees and estimated APRs.