WASHINGTON — Banks have long walked a thin line on debit-card overdraft fees. They are a sore point for many consumers, but the fees generate billions of dollars of revenue each year. Now the Federal Reserve has stepped in to craft new regulations aimed at preventing complaints about high overdraft fees.
Starting Thursday, the rules will prohibit banks from automatically charging overdraft fees. Instead, consumers can decide whether they want to use the service or would rather simply have their debit cards declined. In addition, some banks have stopped charging overdraft fees if the account is a fewdollars in the hole - eliminating the infamous $40 cup of coffee - and are capping the number of charges each day.
According to market research firm Mintel, about 25 percent of consumers it surveyed this spring indicated they would enroll in overdraft services. About 15 percent said they did not want to sign up, and the rest were either unsure or were not aware of the changes.
Banking experts and even industry groups have warned that banks will need to replace the revenue they have long collected in overdraft fees. That means people might find that the fees have disappeared, only to resurface elsewhere in the form of a maintenance fee on their checking accounts, for example.
“The whole banking system is in a state of flux,” said Brian Riley, research directorat TowerGroup, a market research firm. “Consumers have to really read the fine print on this stuff and not go into the banks for the reward programs and the free toaster.”
The new overdraft rules comes as banks grapple with tighter regulations on creditcard interest rates and penalty fees mandated by Congress last year. The financial crisis ignited a movement to strengthen consumer protections from Washington, and Congress continues to debate the creation of an agency devoted to the issue. The Fed began drafting its new overdraft regulations last fall as lawmakers prepared bills with similar restrictions in case the Fed did not act.
Meanwhile, numerous banks braced themselves for what many saw as inevitable. According to a survey by research firm Moebs Services, nearly 14 percent of 2,000 bank and credit unions reported eliminating their overdraft programs altogether. Bank of America ended its program inMarch after extensive interviews with its customers.
“We heard time and time again, ‘Don’t let me spend money that I don’t have,’” said David Owen, head of the bank’s payments business.
Some banks that do not charge overdraft fees are promoting their stance as proof they are more customer-friendly. ING Direct, which hasn’t charged overdraft fees since offering checking accounts in 2006, created an overdraft calculator for consumers to see how much they can save with the online bank.
“The checking account should work for you, not against you,” said Todd Sandler, head of product strategy for ING Direct. “We feel like we’ve taken a much smarter approach in thiscategory.”
People can still elect an overdraft line of credit, however. In those cases, ING essentially lends customers the money they are missing at what Sandler said is a competitive rate, rather than charge aflat penalty fee. Other banks have been touting the ability to tap into savings accounts or credit cards when a checking account is overdrawn.
The Fed’s rules attempt to recognize that the overdraft service can be a useful tool: The rules do not apply to checks or recurring automatic payments. Officials said such payments are often applied to bills, such as rent or car insurance, and consumers indicated that they would rather pay an overdraft charge than have them denied. Several banks also said they will continue to allow overdrafts at ATMs but will notify customers that their balances are insufficient.
“What we wanted to do was to give customers lots of choices,” said Pete Jones, Mid-Atlantic regional president for Wachovia, which has kept its overdraft service. “I don’t think we want to do away with any opportunity.”
Still, Wachovia’s parent company, Wells Fargo, expects that revenue from overdraftfees will fall by $500 million this fiscal year. Bank of America has estimated its losses at $160 million a quarter. Moebs Services estimates that total bank revenue from overdrafts will drop about $2 billion this year to $35.2 billion, the first decline in at least a decade.
Industry groups have said banks will hunt for ways to recoup those losses. Banks could decide to charge customers a fee unless they sign up for multiple accounts, rather than just a checking account, or fail to maintain a certain balance. They might also charge for certain services, such as writing multiple checks.
“We expect that free checking will go very far away,” Riley said.
Here is a summary of the Federal Reserve’s new regulations on bank overdraft charges:
The rules apply to debit-card transactions and ATM withdrawals. They do not apply to checks or recurring payments, such as automatic bill pay.
Consumers must opt in toan overdraft program for a bank to charge any fees.
Consumers who opt in can drop the program at any time.
Banks must comply with the new overdraft rules for all new accounts opened after Thursday.
For existing accounts, banks must comply with the overdraft rules by Aug. 15.
Business, Pages 73 on 06/27/2010