January 28th, 2010
New Opt-In Overdraft Rules For Checking and Debit
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Starting July 1st, banks can no longer charge overdraft fees on debit cards or checking accounts without explicit permission from customers. Currently, banks automatically enroll customers in overdraft protection; the new reform gives consumers the choice to opt out of overdraft protection, and instead have their debit card declined or ATM withdrawal restricted if they overspend rather than be covered by the bank at steep fee. The choice to enroll in overdraft protection, which typically costs accountholders $30-$35 to cover overdrafts, is part of the government’s series of reforms on the credit and banking industry instituted last year.
Government officials cite that banks receive $25 to $38 billion a year in overdraft fees. For banks, this new rule will result in an enormous drop in revenue. With this much profit at stake, the nature of free checking accounts may change in the coming year while banks attempt to convince consumers of the benefit of overdraft protection in order to pad their bottom line. Overdraft coverage and other fees subsidize free checking accounts and banks profit from careless customers and frequent overdrafters.
Consumers should be prepared for banks’ possible reaction to the reform; don’t be surprised if banks start charging monthly fees on free checking accounts to recoup losses, and banks will likely bombard consumers via email, snail mail, phone calls, and even text messages urging them to sign up for overdraft protection. The New York Times blogged that a marketing company that works with 7 of the 10 largest credit card issuers is planning to target and market overdraft services to “higher value” customers, i.e customers with a propensity to overdraft.
Overdraft protection will most benefit customers who want the security and peace of mind of being covered by the bank in case they are at the cash register or ATM with insufficient funds. While overdraft protection means consumers don’t need to worry about being declined, in an extreme case, overdraft protection could result in hundreds of dollars in fees for multiple transactions on an overdrawn account. Overdrawing $3 for a cup of coffee and $2 for a pack of gum in a single day would slap you with a $70 fee.
Take note: the new rules don’t apply to overdraft protection for bounced checks and automatic, scheduled transactions, only debit card purchases. After July 1 for new accounts, banks will give consumers full disclosure of debit card and checking account policies, and will not be enrolled in overdraft protection without their permission; for existing accounts, banks can continue to keep customers automatically enrolled until August 15, at which point customers can opt out. Whether you think overdraft coverage is a privilege or predatory practice, consumers will soon have the choice to decide for themselves.