[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.