A seemingly simple rule on debit card overdraft fees is making banking more complicated for millions of consumers.
Starting July 1, banks must get permission from customers before they can charge a fee for covering a debit card purchase or ATM withdrawal if there aren't sufficient funds in the account. Initially the rule only applies to new customers, existing accountholders will be included starting Aug. 15. If consumers elect to forego overdraft coverage, banks stand to lose a large chunk of their income. Revenue from fees topped $37 billion last year, estimated economist and consultant Mike Moebs.
To make up for the lost revenue, many banks are doing away with free checking, and adding monthly or quarterly maintenance fees. Consumers can often avoid these new fees, however, if they take steps like linking multiple accounts or arranging for direct deposit of their paychecks.
But that requires paying attention to correspondence from banks, and a lack of attention had a big role in creating the problem to begin with.
A $44 cup of coffee?
The Federal Reserve issued the rule requiring consumer consent amid protest about the surge in overdraft fees, which often caught people unaware.
By 2008, 75 percent of banks were automatically enrolling customers into programs that charged up to $39 for any overdraft, according to a study by the Federal Deposit Insurance Corp.
In many cases, consumers weren't clearly informed they were enrolled, said Linda Sherry of Consumer Action. When they were told, "it was presented to them, in virtually all cases, in fine print or in marketing materials that put a really positive spin on it," she said. Banks also often didn't make it clear if there were less expensive options.
As debit card use soared — their use outpaced credit cards in 2006 — that led to more frequent charges for minimal purchases. Consumer advocates complained that a $5 cup of coffee could wind up costing $44.
In the past, individuals typically weren't aware they were overdrawing their account as they swiped to pay for a latte. Under the new rules, if they haven't chosen to enroll in overdraft programs, they face embarrassment at the register as their card gets rejected.
Many banks have been emphasizing fear of that embarrassment as a way to preserve this important addition to their bottom lines in campaigns to urge customers to opt in. Analysts at Sandler O'Neill calculated they represented a median 8 percent of operating revenue in the last year for 127 banks they examined, and as much as 28 percent for some.
Regulators also took into account FDIC statistics that show more than 74 percent of consumer accounts have no overdrafts, while 4 percent of accounts rack up 20 or more each year. Meanwhile, half of all checking accounts are not profitable for banks. That means habitual overdrafters have been helping to pay for the "free" accounts of people who balanced their checkbooks but didn't have balances high enough to earn money for the bank.
Will customers opt in?
Banking experts are divided on how many consumers will decide to stay in overdraft programs.
Many will not make a choice — at least not immediately, said independent banking consultant Bert Ely. The inserts in statements and e-mail from banks will largely go ignored, he maintained, especially since such a large swath never exceed their balance. "There's no history on this to extrapolate from," Ely said. "Banks are feeling their way along. They don't really know what their revenue losses are going to be."
Banks surveyed by Aite Group analyst Wesley Wilhelm estimated just 41 percent of customers have chosen so far to remain in overdraft programs. "I frankly think that's optimistic," he said.
But noting that the Aug. 15 deadline falls in the heart of back-to-school shopping, which leads directly into the holiday season, Moebs predicted as many as 95 percent of all bank customers will eventually opt for some kind of overdraft protection — including lines of credit and services that shift funds from savings accounts to tapped-out checking.
Still, when combined with other regulations, such as expected limits on the fees banks collect from merchants for debit card use, banks know they'll be losing revenue.
The nation's largest banks have already modified overdraft policies.
Bank of America led big banks with 12 percent of its revenue coming from fees in the last year, according to Sandler O'Neill. It allows overdrafts of $10 or less at no charge, and is eliminating larger overdrafts at the register. It now requires customers to agree to fees before they can overdraft at ATMs.
At Wells Fargo and JPMorgan Chase, fee revenue was about 6 percent. Wells Fargo allows opt-ins for overdrafts at the register, but doesn't charge fees if the deficit is $5 or less. JPMorgan Chase also has an opt-in program. Citibank never permitted debit card ATM or point-of-sale overdrafts, and generated just 1 percent of its revenue from service charges.
The end of free checking?
All the big banks offer options like lines of credit and programs to shift money from savings accounts or credit cards. Although they charge for basic checking accounts, there are options like opening an account online, using direct deposit or sustaining a minimum balance to avoid paying so-called maintenance fees. Bank of America is testing different fee structures, and may change some of the conditions behind the waivers in the future.
Midsize and community banks, which were more reliant on the fees, are following this path.
For example, TCF Bank, widely considered the first bank to offer free checking, got 26 percent of its revenue from fees, Sandler O'Neill said. Wyzata, Minn.-based TCF added monthly maintenance fees starting at $9.95 to all accounts in March, but exempts customers who use direct deposit, or meet minimum deposit or balance requirements.
One result of the change was that customers who had multiple accounts with little use closed or consolidated them, said TCF spokesman Jason Korstange. That saves the bank money, because it no longer has to maintain inactive accounts. He would not say what portion of the bank's customers have opted in to overdraft coverage.
Some banks are offering free checking to customers who elect to receive only online statements. Others are simply charging for paper statements or adding services like identity theft protection for a monthly fee. And consumers should watch out for hikes in existing fees, like a bump in the cost to use another bank's ATM.
Some banks, however, see the new regulations as an opportunity.
Moebs said he knows of 35 that have lowered overdraft fees to make opting in more appealing to customers, while raising fees for returned checks and other rejected transactions. He suggested this strategy could persuade more customers to stay in overdraft programs, and generate volume that can make up for the lower fee.