Overdraft protection up to customer

If you carry a debit card and have not received a notice from your bank about overdraft-protection services, chances are good you will very soon. With new federal regulations coming into affect this summer, banks are notifying customers by the thousands that they will need to expressly “opt-in” for overdraft services.
Regulations adopted by the Federal Reserve last fall require banks to explicitly receive permission from customers before enrolling them in overdraft protection. The rule, known as Regulation E, came after a barrage of criticism from consumer advocates that said banks were allowing customers with no money in their accounts to purchase small items, such as a $3 latte, and then slamming them with overdraft charges up to $35 a pop. The new regulations require banks to decline such transactions unless the customer signed up for the service.
Banks have responded by sending a flurry of letters and e-mails that, in many cases, encourage customers to sign up for the service. But banks are hesitant to call it a marketing campaign aimed at protecting a revenue stream that brought U.S. banks an estimated $23.7 billion in 2008, according to Center for Responsible Lending.
“It’s not a huge financial issue for us in the overall scheme of things but we look at it more from a customer standpoint, if this is something you rely on or use regularly we want to make sure you know about it,” said B. Michael Rauh Jr., The Washington Trust Co.’s executive vice president of sales, service and delivery.
And Washington Trust really wants customers to know. The bank sent out about 18,000 letters last month to its active debit card users and followed it up with messages sent across its online banking platforms. E-mails will come, as will notices in the branches.
“With every single touch point they’re receiving some type of communication,” said Elizabeth B. Eckel, senior vice president for marketing.
Eckel and Rauh said the bank is motivated by a desire to protect its customers, fewer than 0.05 percent of which use overdraft protection. The executives said the last thing they wanted was a customer standing at the checkout line of a grocery store or at dinner to face the embarrassment of a declined card. That – and the federal requirement – is also the motivation behind the notification process at Pawtucket Credit Union, said Tim Jermain, senior vice president for business development and technology. Jermain said the bank likes the revenue from the fees, but it would not be detrimental if no one signed up for the service.
Customers who do sign up will find a different service. Starting Aug. 15, Pawtucket Credit Union customers that opt-in for overdraft protection will be charged between $5 and $35, depending on the amount they overdraw. The new fee structure, Jermain said, avoids the scenario of paying $35 for overdrawing an account by a few dollars. BankNewport is exploring implementing a similar, tiered system said Julie Mott, vice president and deposit servicing manager.
Other banks have responded by eliminating the service and fee entirely for point-of-sale transactions, or those made with a debit card. Bank of America announced earlier this year that, starting this summer, it would no longer authorize point-of-sale purchases that overdraw the account, period. Customers at ATMs trying to withdraw more money than available will face a choice: receive the money and pay a $35 fee or cancel the transaction.
“It really limits customers’ ability to unknowingly withdraw their account,” Bank of America spokesman T.J. Crawford said.
As for the banks that keep the overdraft services, executives said it was hard to predict how many customers would opt-in. Echoing comments from other bank executives, Mott said she expected customers who used the service in the past would sign up readily. Mott and other executives said it remained to be seen how many customers that never used the service would opt-in.
Banks are also promoting other overdraft-protection services, including the ability to link checking and savings accounts for a monthly or yearly fee. When an overdraft occurs, the money comes out of the savings account with no additional fee. As the banks inform customers of their options, consumer advocates are urging federal regulators to stop banks from sending alarmist notices.
“This is a big pot of money. It’s a major part of the service charges on deposit accounts … so they have a very strong financial incentive to persuade their account holders to sign up for something that’s good for the banks but not good for their customers,” said Jean Ann Fox, director of financial services for the Consumer Federation of America.
Federal regulatory agencies, including the Comptroller of the Currency, have responded to such concerns by issuing notices advising banks against alarmist tactics. Such warnings may not go far.
Bryant University finance professor Peter Nigro said he expected banks to “do anything” to encourage customers to sign up, especially after witnessing Congress attack their fee-based services for much of the last year. Lawmakers have gone after not only overdraft fees but credit card fees and transaction fees charged to merchants when they process customer cards.
Nigro also expressed weariness at the arguments presented by banks about overdraft fees shielding a customer from embarrassment or hassle. Most Americans today, he said, have multiple ways to pay at the checkout register. Indeed, the Federal Reserve Bank of Boston said that a 2008 survey showed the average credit card-carrying American has 3.5 cards. The average individual carries $79 in cash.
“This is just another example of their sources of revenue and profits coming under attack, so they are going to do anything they can to keep that cash cow coming,” Nigro said.
He said opting in made little sense for consumers given the high fees to borrow what is often very small amounts of money. The absence of overdraft protection could also force people to learn the importance of budgeting and living within their means, Nigro said. And that, he said, is something most Americans desperately need to learn. •