Like the security of overdraft> protection but don t like the automatic $20 to $45 fees banks charge? You re in luck sort of.
In response to new federal rules that take effect July 1, a handful of banks are trimming the overdraft fees they automatically charge for debit purchases and ATM withdrawals. And to make up for the lost revenue, they have another plan: Convince customers to voluntarily opt in for overdraft coverage -- that is, a line of credit that kicks in when account holders make purchases that exceed their available checking account balance.
Last week, U.S. Bancorp announced that customers who write checks, withdraw money from an ATM or use their debit cards on an account that is overdrawn, will see reduced fees. Currently, fees are based on the frequency of overages in a 12-month period. For the first incident, there s a charge of $19. The second, third and fourth incidents come with a $35 penalty per overage. And when five or more overages occur within that year-long period, the fee kicks up to $37.50. Under the new fee structure, which is expected to take effect in August, any purchase of $20 or less on an account that's overdrawn is assessed a reduced fee of $10, and anything over $20 gets a $33 fee. (Note that in a separate change made last fall, if an account is overdrawn by less than $10, there is no fee. Further, the number of overdraft transactions that get assessed a fee are capped at three per day as of March 31.)
Also at the end of March, Bank of America (BAC)
Separately, a number of other banks including JP Morgan Chase have ramped up their marketing and overall employee outreach efforts to notify customers about the benefits of maintaining the status quo -- that is, for many banks, automatically enrolling customers in overdraft services that charge hefty fees.
Although banks claim that these measures are a response to customers wishes, they re likely also concerned about a loss in revenue, says Michael Moebs, economist and CEO of Moebs Services, an economic research firm in Lake Bluff, Ill. The new mandatory opt-in rule, combined with the uncertainty surrounding financial reform, will cut into banks revenue by an estimated $1.95 billion in 2010. Overall, financial institutions should earn roughly $35.2 billion from overdraft fees in 2010, down from $37.1 billion in 2009, says Moebs.
Thanks to that drop, some credit experts say that a resurgence of annual fees on checking accounts may be in the future. Standalone checking is usually a loss leader for banks, says Ben Woolsey, the director of consumer research at CreditCards.com. Without that added income from overdraft fees, banks could look to re-institute monthly fees on checking accounts, which used to be the norm before the advent of overdraft protection.
An alternative might be to require other banking relationships like [certificates of deposit] or savings accounts to be set up in return for free checking, Woolsey says.
Some analysts think that banks might -- and perhaps should -- begin firing their unprofitable account holders. The laws set to go into effect July 1 would bar financial institutions from discriminating against consumers who do not opt in -- that is, a bank would need to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. However, research and financial-services advisory firm Celent argues that since about half of all checking accounts are unprofitable, financial institutions need to fire customers, or get them to pay more or change behavior based on their overall relationship with the financial institution, according to a May 2010 report entitled Reg Reg Go Away.
As of now, though, even the banks themselves haven t figured out their plan of action. It s hard to look into a crystal ball, says Kent Stone, an executive vice president for consumer banking at U.S. Bank. We ll wait and see how the competitive landscape shakes out.
Next week, Bank Notes looks at how to eliminate overdraft fees and stay protected from overages. >