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Proposed Overdraft Fees Legislation and Impact to Reward Checking

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Now that credit card legislation has become law, Congress will likely focus on consumer protection related to checking accounts and debit cards. This NY Times article, Overspending on Debit Cards Is a Boon for Banks, looks at the overdraft issue and the bill introduced by Representative Carolyn Maloney, Democrat of New York. Her press release described the bill:
[It] would require notice to customers at the ATM or point-of-sale terminal when a purchase is about to trigger an overdraft - and would give consumers at the transaction point a choice of whether to accept or reject the overdraft service and the associated fee.
[...]
and requires disclosure of the terms and charges associated with an overdraft program and an opportunity for account holders to opt in, rather than being automatically enrolled.

This seems reasonable. However, it could have a major impact on banks and savers who never incur overdraft fees. The following is an excerpt from the NY Times article:
Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney's legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation's banks and credit unions collect more from overdraft services than they make in profits, he said.

This seems a little extreme. Nevertheless, there are a lot of stats that do show overdrafts account for a lot of fee income for banks. This FDIC study states that "NSF-related fee income accounted for 24.8 percent of the total noninterest income earned in 2006 by study population banks."

The banking industry claims that reduced NSF revenue will also have a major impact on checking accounts. According to the NY Times article, "some banks have said they might slap a monthly fee of between $10 to $20 on every free checking account." It could also impact reward checking. This marketing brochure from BancVue compares the NSF revenue from free checking and reward checking. It shows that NSF revenue is actually a little higher for reward checking than for free checking. In both cases, NSF revenue is much higher than revenue from debit cards.

I'm not sure how NSF revenue goes up with reward checking since you would think most people would keep their balances high in reward checking accounts. My guess is that most people don't have large savings. They may have good intentions about saving and open reward checking accounts in hopes to earn attractive interest rates on future savings. However, most of the time their balances are small, and with the habit of always using the debit card to meet the monthly requirements, overdrafts become more likely.

As a saver who has never had an overdraft, I can identify with the following comment at the end of the NY Times article:
What happened to personal responsibility? Consumers are responsible for managing their own checking accounts. If you bounce a check, you pay the price. We also have freedom of choice thanks to a free market system. If you don't like the price find another bank. I bank with a local credit union that only charges me $4 when *I* screw up. I choose not to bank with mega-banks.

However, I can also understand some of the complaints about banks going too far in profiting from NSF fees. I think the vast majority of people would prefer that the bank deny a debit card purchase if the checking account balance isn't large enough. So if banks really cared about their customers, they shouldn't automatically enroll them into overdraft programs. However, should regulations require this?

Thanks to the reader who emailed me the link to this NY Times article.

Overview of High Yield Reward Checking Accounts:

If you're not familiar with reward checking accounts, please refer to my reward checking introduction and my post on the math behind reward checking.


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Comments
24 Comments.
Comment #1 by moolah (anonymous) posted on
moolah
it amazes me how careless people are with their money.

hopefully the banking lobby in washington is strong enough to prevent the proposed legislation from becoming law.

banking fees are annoying... but it doesnt take a genius to completely avoid them.

-1
Comment #2 by Anonymous posted on
Anonymous
Pretty soon all Reward checking accounts will disappear thanks to Representative Carolyn Maloney, Democrat of New York.
Or the interest rates will be negligible for all practical purposes. This is a conspiracy against the consumer under the pretense of protecting the people.
Get rid of this Congress ASAP.

-1
Comment #3 by Anonymous posted on
Anonymous
I bank at a bank that allows you to "opt-out," but it doesn't quite work the way you think it should. They will deny the debit, but because it was like writing a check, you still get hit with the overdraft fee, and you don't get your purchase. So honestly, this idea that people would "prefer" to have the debit declined, is probably because they think they won't have to pay the OD fee. All this "opt-out" option does is keep one from doing multiple debits not knowing they are overdrawn.

1
Comment #4 by Clotario (anonymous) posted on
Clotario
Re: 'Impact to reward checking' - Doesn't anyone recall what the credit card companies said they'd have to do if there were new regulations? Same ploy - since only a percentage of users encounter these problems, make the rest scared that they'll lose privileges if the regulations go through. They swore up and down that free credit cards would be a thing of the past - does anyone see that occurring? No.
Regulate and **** the shysters. In the NYT article they said if overdraft fees were eliminated a 1000-odd banks would go under.
Puuuhhhllleeeezzzeeee........

1
Comment #5 by Anonymous posted on
Anonymous
I worked in a bank for 30 years. When a customer comes in for a cash advance on their credit card, if no credit is available the transaction will be denied when the card is swiped. That at no cost to the customer. The person conducting the transaction would only say that the transaction was denied. The same process should be available with a debit card connected to a checking account.

3
Comment #6 by Anonymous posted on
Anonymous
More of the same.... protect the deadbeats and punish the prudent! When will people grow up and take responsibility for their actions?? VOTE OUT THE LIBERALS!!!!

-1
Comment #7 by Anonymous posted on
Anonymous
Thank you anonymous posted at 4:32pm

Indeed, vote out the liberals.

If one is careless [ or imcompetent ] enough not to manage
their account why should anyone else have to pay for their imcompetence.

I cannot tell you how angry this makes me.

The reward checking accounts are the only thing we have left.

Whats next????

Prime example of liberalism: look at the financial condition of the
state of California.

1
Comment #8 by quantumslip (anonymous) posted on
quantumslip
personal responsibility must be balanced with rules and regulations; we cannot go all the way in either direction. in this case, i feel there needs to be some reform/change, especially with the increase in debit card usage. with holds being a common thing, it is pretty feasible for your account balance to be a lot lower than you think.

sure, some people don't know how to use their money. but some are responsible people who are just going through hard times and then have this to deal with.

i am not saying this legislation is perfect. but to assume that this "liberal" bill is to only help the "careless" is wrong.

-1
Comment #9 by Anonymous posted on
Anonymous
.

Err ... actually choice between automatically opting in or out sounds too easy to solve. Don't do opt-in/opt-out automatically at all!

Similar to entry for specifying the 'backup with-holding' have one more entry to specify the choice between enrolling or declining the overdraft protection ... problem solved.

>> Michael Moebs, an economist who
>> advises banks and credit
>> unions, said Ms. Maloney's
>> legislation would effectively
>> kill overdraft services,
>> causing an estimated 1,000
>> banks and 2,000 credit unions
>> to fold within two years.

Hmm ... I guess that's fine. Market situation surely causes some institutes to go under and some to thrive. Lawmakers I believe are supposed to look after the best interest of the people they represent. The people they represent will include a) Customers of the banks/CUs that are likely to go under b) Owners/Members of the banks/CUs that are likely to go under c) Employees of the banks/CUs that are likely to go under ... Therefore I'd trust (gag) the lawmakers to make the right choice. ... Err ... did I forget something ... oh yes ... the lawmakers do not represent the d) Lobbyists of the banks/CUs that are likely to go under and e) Contributors from the interested parties of the banks/CUs that are likely to go under ... Yes ... the things are quite interesting.

.

1
Comment #10 by Anonymous posted on
Anonymous
My local bank posts the following balances on my checking account:

Current balance, posting balance, available balance and ledger balance.

How easy it is to make a mistake just by looking at my online account?
It is very easy and what makes it worst, is that there is another balance called previous balance and a column for future balance.
If I make a debit card purchase,
all balances are out of whack and none is correct balance according to my checkbook record.
This is done on purpose to make you go overboard.
No regulation on earth can rectify such accounting system presented to the consumers.

1
Comment #11 by Anonymous posted on
Anonymous
It costs nothing for the bank to reject transactions or transfer money between accounts and so the charge for these "services" should be close to their cost. A NSF failed transaction should be close to $1 not close to $35 and automatic overdraft or transfer should also be close to $1 not $35.

I've never been hit by an overdraft or NSF fee, I've setup a line of credit to absorb overdrafts (for free) on every checking account I write checks against.
I was hit by one $5 charge for a balance being below some threshold once (after I switched between checking account types with different balance requirements), but customer service was willing to refund the charge.

While it won't benefit me these bank fees are crazy and should be outlawed or regulated.

It it not appropriate to charge someone multiple overdraft fees in the same day (without providing any notice that their account is overdrawn), reorder drafts from an account so that many overdraft fees are charged (instead of a few), hide the fact that the fees are being charged at point of sale time, make it difficult or impossible to disable these "services", etc.

Even if you are a monopoly (which banks are not) ****ing your customers is not a good business practice, once enough people are ****ed off laws will change and end your fun.

Businesses need to stop making short sighted decisions to maximize short-term profits and think long term.

1
Comment #12 by Fee'd Up (anonymous) posted on
Fee'd Up
One of my banks isn't wasting any time ramping up fees (and driving me away with their monthly fee). ::
Effective September 1, 2009 we will begin to charge a $5 per day Overdraft Charge. This fee will be assessed to your account starting on the eighth consecutive calendar day of being overdrawn. Also effective September 1, 2009 we will begin to charge a Collection Item fee of $10 per local or foreign item.
********************************************************************************
Effective 11/01/09 the name of your checking account will change to Platinum Checking. There will be a monthly service charge of $8.00 imposed every statement cycle if the daily balance in your account falls below $2,000 any day of the statement cycle. Your account will still have the same electronic requirements each month as well as the same interest tiers it does today.
********************************************************************************

1
Comment #13 by Gerard Sorme (anonymous) posted on
Gerard Sorme
"That is because 45 percent of the nation's banks and credit unions collect more from overdraft services than they make in profits, he said."

^^^^^^^^^^^^^^^^^
If that figure is anywhere CLOSE to being true, then a lot of banks aren't really in the banking business at all - they're in the Gotcha Fee Collection business. Read that quote above again -- and think about it.

1
Comment #14 by Anonymous posted on
Anonymous
It is absolutely NOT only 'irresponsible customers' who suffer under bank overdraft programs!! Absolutely innocent customers get taken advantage of by these programs. Case in point: my significant other had automatic payroll deposits for years without problem, however, while we were vacationing the autodeposit went awry (employer error) and his checks were not properly deposited. Dozens of charges he made using his debit card were paid under the banks's "overdraft" plan before he realized there was a problem. He was ding'd $25 dollars a pop, adding up to a ridiculous amount - his overdraft fees added up to far more than the total of his original charges!! If he had been given notice at the register that there was not enough money in the account to pay the charge, he would've immediately known there was problem and could have addressed it. So, hooray for this bill, may it pass with flying colors!!! And btw, regardless of this bill passing, banks will still need to compete for customers, so there will continue to be rewards (or similar) accounts. Smart banks will just become more efficient (by cutting back brick and morter hours, etc.).

1
Comment #15 by freemarketscostdearly (anonymous) posted on
freemarketscostdearly
Regulate these banks! I am all for reform. I realize it will may hurt my pocketbook a little bit, as banking guy notes. But, I am sick of the games these banks play. Sick of deregulation. Sick of conservatives too. Vote out the conservatives.

1
Comment #16 by Anonymous posted on
Anonymous
.


>> It is absolutely NOT only
>> 'irresponsible customers' who
>> suffer under bank overdraft
>> programs!! Absolutely innocent
>> customers get taken advantage of
>> by these programs.

Err ... Are you claiming that your significant other was absolutely innocent rather than completely irresponsible?

If you are writing a check or making a debit card purchase then you and you alone are responsible for making sure that you have funds sufficient to cover the transaction you are making. If you fail, then I'm sorry to say you are irresponsible.


>> Case in point: my significant
>> other had automatic payroll
>> deposits for years without
>> problem, however, while we were
>> vacationing the autodeposit
>> went awry (employer error) and
>> his checks were not properly
>> deposited. Dozens of charges he
>> made using his debit card were
>> paid under the banks's
>> "overdraft" plan before he
>> realized there was a problem.
>> He was ding'd $25 dollars a
>> pop, adding up to a ridiculous
>> amount - his overdraft fees
>> added up to far more than the
>> total of his original charges!!

Well ... did he not accept the convenience of direct deposit for years rather than getting the pay-check in the mail and then going to the bank to make the deposit? Sounds like he got quite irresponsible about not even bothering to check if the deposit is made before making transactions that depended upon it.

Also did he not take the responsibility of maintaining sufficient balance (perhaps greater than or equal to zero) at the bank, or else pay the overdraft fees that the bank may charge?


Nah ... he is not absolutely innocent ... I'd say he is shirking from his simple responsibility of ensuring availability of sufficient funds.


.

-1
Comment #17 by Anonymous posted on
Anonymous
.


>> Gerard Sorme said...

>>>> "That is because 45 percent
>>>> of the nation's banks and
>>>> credit unions collect more from
>>>> overdraft services than they
>>>> make in profits, he said."


^^^^^^^^^^^^^^^^^
>> If that figure is anywhere
>> CLOSE to being true, then a lot
>> of banks aren't really in the
>> banking business at all -
>> they're in the Gotcha Fee
>> Collection business. Read that
>> quote above again -- and think
>> about it.


Indeed ... Good point Gerard. The information given in the quote does not sound credible at all. I do not trust NY Times article is giving accurate information.


.

1
Comment #18 by Anonymous posted on
Anonymous
I would say most of the overdraft fees come from checks anyway, not the ATM. The stats for banks going out of business are in the case of banks loosing all overdraft fees not just atm overdraft. usually people can check their balance first at an atm before a withdrawal as well.

1
Comment #19 by Anonymous posted on
Anonymous
you have to remember the government is in bed with the banks so they are not going to do anything that causes the banks to loose. The government also wants to look like they are doing something so why not take away atm overdraft fees. That way it come across to the people is the government is really helping out, the reality is atm fees are a small portion of total overdraft fees and and really small portion of bank fees. It really is a win win the bank keeps all the fees and the government are heroes.

1
Comment #20 by Anonymous posted on
Anonymous
Another thing: it's unfair that banks can pick and choose with checks or debit transaction to process on a given day; they choose the large checks first or large transactions first. If gift cards (visa, mastercard, discover card, or amex) can decline a transaction that is higher than the value of it, then banks can do the same with debit/atm cards if the account does not have enough balance for the transaction. It's that simple! They did it in the early days of ATM's existence; so with more technology, they can go back to it.

1
Comment #21 by Anonymous posted on
Anonymous
One time my account showed plenty of money of a friday after close of business. I bought a few things here and there... .99 cent bag of chips, 1.25 soda, etc. My mortgage check got cashed saturday (not precessed til monday) and all of a sudden my account is "negative" because the purchase authorizations on my debit card were higher than the actual purchase price... so I get charged an overdraft fee of $39 for every small purchase I made since friday costing me over $600 in fees and putting my accound about -$400. (They cash checks first, and then charge you so you get a fee for every single purchase) When the dust settled on monday, it was clear my account should have stayed at least $200 positive, but because of the purchase authorizations, the ****ed me... hard. Couldn't get the money back. I hate these **** hole banks that think they can steal your money and I hope they pass laws that cause them to hurt financially. Why should criminals be in business? I belong to a local credit union after this. I can't afford to be jerked around in this economy.

1
Comment #22 by Anonymous posted on
Anonymous
My husband and I had a $4 deficit in our bank account at close of business Thursday. Wells Fargo (who now own Wachovia, and Wachovia is who we bank with) sent a direct payment through of my husband's gym membership.

Fair enough - his paycheck didn't deliver itself to the bank until midnight, and the deficit was there. HOWEVER, Wells Fargo kept sending the payment through EVERY FEW MINUTES until midnight, incurring a $35 overdraft fee each time its automated system kicked it through. The $20 monthly gym membership, instead of going through in the morning like it should have, wound up costing us over $800.

If they'd sent it through once, ok. It was our fault. Don't pay it, charge us the $40 overdraft, but don't send it through as many times as you can at night, when I can't do anything about it and don't know it's going on. This is our first (and last) experience with banking with Wells Fargo.

1
Comment #23 by Anonymous posted on
Anonymous
It is time to shut down the zombie TARP banks and let the healthy banks move on, but there is no political will to pay for this, so we will be in limbo for decades like Japan and the little guys will pay.

1
Comment #24 by IceMage (anonymous) posted on
IceMage
really, it's just about how some banks order transactions to maximize NSF fees. I think it's dishonest, and unfair to the consumer for a bank to be allowed to order transactions in such a manner.

1